Investors around the world will be watching US markets this week. It is the busiest week of the fourth-quarter earnings season, the Federal Reserve has a monetary policy announcement and we get the first look at Q4 GDP. While the Dow Jones Industrial Average, extended its slide for the third trading day, Nasdaq and the S&P 500 held onto their gains. This performance reflects the market’s belief that big tech earnings will be strong. If they’re right, this strength could carry over to the Dow and take currencies higher. For now, most of the major currencies pulled back on Monday with the exception of the New Zealand dollar.

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While FOMC and GDP are important we expect corporate earnings to have a bigger impact on FX and equity flows. Strong results fuels hope for a more robust late Q1, early Q2 recovery. The Federal Reserve is widely expected to leave interest rates unchanged but Jay Powell’s outlook for the economy and comments on tapering could affect asset movements. We believe he’ll echo the optimistic glass have full outlook shared by his peers last week but in contrast to some Fed Presidents, he’s likely to be tight lipped on tapering because it's simply too early to call. If we are right, the Fed meeting should pose no risk to the equity market rally. GDP on the other hand could trigger selling. It's no secret that the fourth quarter was hard for the US. Virus cases surged, the Capitol was attacked and retail sales fell every month between October and December. GDP is expected to rise 4% compared to 33.4% in Q3 but there could be a bigger downside surprise.

It could also be a challenging week for the euro. Despite better than expected PMIs and ZEW, the German IFO report surprised to the downside. The business sentiment index dropped from 92.2 to 90.1 in the month of December. This decline was no surprise because the second virus wave halted the economy last month, but a similar deterioration in the expectations component is more concerning. Everyone from investors to central bankers see stronger growth in 6 months' time but German businesses remain pessimistic. On Thursday we’ll get to see if that sentiment is shared by Eurozone consumers and businesses. On Friday, Germany releases its fourth-quarter GDP report and we should see the first of two negative quarters that make a double-dip recession. GDP growth is expected to fall and unless there is a strong snapback in February or March, growth will remain negative in the first quarter.

The New Zealand dollar was the day’s best performer despite reports of the first community COVID-19 case in months and this time, it’s the South African variant, a more infectious version of the original strain. What’s interesting about this exposure is that the person traveling back from Europe quarantined for 14 days and tested negative twice before leaving for home. Unfortunately, she’s visited 30 different places in NZ before discovering that she was positive. In response, Australia halted its travel bubble with New Zealand – all travelers coming from NZ will now have to quarantine in a hotel instead of being granted immediate access into the country. Still, NZD saw strong demand ahead of tonight’s service sector PMI report. Manufacturing activity contracted at the end of the year but the services index which dipped below the 50 mark last month could recover in December.

With the exception of the Swiss Franc which followed the euro lower, the other major currencies were unchanged. Sterling bounced off its lows but the country’s lockdown could lead to a weaker labor market report on Tuesday. We expect to see a sharp rise in jobless claims and slowdown in wage growth.