Forex Weekly Outlook Jan. 18-22 2021 - US Dollar Shows Signs Of Strength

Coins, Banknotes, Money, Currency, Finance, Cash

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Early in 2021, the US dollar is showing signs of rebounding after suffering broad losses in the last two months of 2020. COVID-19 continues to run rampant in the US and Europe, but there is optimism that the roll-out of COVID-19 vaccines will bring about economic recovery later in the year. This week’s highlights include rate decisions from the ECB and the Bank of Canada, and inflation reports from the eurozone and the UK.

In the UK, GDP for November contracted by 2.6%. This was better than the forecast of -4.6%, but the pound still posted sharp losses on Friday. Industrial numbers sagged in November. The pound posted gains of over 1% early in the week, after BoE Governor Bailey dismissed reports that the BoE was considering the possibility of implementing negative interest rates.

Headline inflation in France, the eurozone’s second-largest economy, posted a second straight gain of 0.2%.

In the US, headline inflation improved to 0.4%, up from 0.2%. This was a four-month high and could signal that inflation is at long last moving higher. Fed Chair Powell reiterated the Fed’s dovish stance, saying now is not the time to discuss exiting accommodative policy. Powell also pledged to give the markets plenty of notice before scaling back its massive QE program.

The week ended with dismal retail sales numbers for December. The headline figure came in at -0.7%, which followed a -1.1% from a month earlier. Core retail sales fell to -1.4%, down from -0.9% beforehand. This was its lowest level since April.

  1. German Final CPI: Tuesday, 7:00. Inflation has struggled in the eurozone’s largest economy, with declines for most of H2 of 2020. However, the forecast for December stands at 0.5%, which would be the strongest gain since June.
  2. UK Inflation Report: Wednesday, 7:00. After rising to 0.7% in October, CPI slowed to 0.3% in the November reading. The forecast for December stands at 0.5%. Core CPI improved to 1.1% in November and is projected to rise to 1.3% in December.
  3. Eurozone Inflation Report: Wednesday, 10:00. Headline inflation has reeled off four straight declines, and this trend is projected to continue in December, with an estimate of -0.3%. The core reading is expected to remain at 0.2%.
  4. Inflation Report: Wednesday, 13:30. Headline CPI slipped to 0.1% in November, down from 0.4%. Trimmed CPI, which excludes the most volatile items, has been steady and came in at 1.7% in November. We now await the December inflation numbers.
  5. BoC Rate Decision: Wednesday, 15:00. The Bank of Canada rate remains at a low level of 0.25%. There has been some talk of a shock rate cut this week due to the deteriorating COVID-19 situation. However, the likelihood of such a drastic move remains low.
  6. ECB Rate Decision: Thursday, 12:45. The ECB minutes last week noted concern with low inflation and the high exchange rate, and policymakers could reiterate these concerns in the rate statement at the upcoming meeting. No change is expected in the current monetary policy.

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