FX Outlook – What To Expect For FOMC, Retail Sales And BoE

This will be a busy week for the forex market. There are three central bank meetings, U.S. retail sales, New Zealand Q4 GDP, Australia’s employment report, and Canadian retail sales scheduled for release. The main focus will be the Federal Reserve’s monetary policy announcement but every one of these events could have a meaningful impact on currencies that could lead to interesting cross moves. The U.S. dollar kicked off the week with gains against most currencies despite a pullback in Treasury yields. Manufacturing activity in the New York region accelerated with the Empire State index rising to 17.4 from 12.1. Better than expected U.S. data is one of the main reasons why investors expect the Federal Reserve to upgrade their economic projections this week.

U.S. dollar banknote with map

Image Source: Unsplash

Investors have a lot of questions for the Fed. The last time they updated their forecasts was in December and a lot has changed since then. Fresh lockdowns were put into place during the holidays but many of those restrictions have been eased after more than 20% of the population received at least one COVID-19 vaccine shot. The outlook brightened significantly over the past few months so at minimum the economic projections will need to reflect that. Growing price pressures should also lead to upgraded CPI forecasts. But two big questions remain – is the latest rise in yields worrying the Fed and how will the dot plot forecast for interest rates change. Chairman Powell made in clear in recent comments that he’s not worried but how long can U.S. policymakers remain cool if yields continue to shoot higher?

Even if Powell continues to downplay the move in yields, the dot plot will most likely edge upwards and when combined with higher economic projections, the dollar should extend its climb. If it falls, we expect bargain hunters to swoop in quickly. Tomorrow’s retail sales report will play an important role in setting expectations for Wednesday’s rate decision. Currently, economists are looking for spending to contract in February after a strong January. However higher gas prices, an uptick in average hourly earnings growth along with a very strong jobs report supports a positive surprise.

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