Forex Weekly Outlook Jan. 25-29 2021 – Fed On Stage After ECB Stays Pat

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The US dollar has given up some ground after a strong rebound in early January. COVID-19 continues to run rampant in the US and Europe, but there is optimism that the roll-out of vaccines will bring about economic recovery later in the year. This week’s highlights include the Fed rate decision and GDP reports in the US, France, and Canada.

German CPI posted a respectable gain of 0.5% in December, confirming the initial estimate. However, Eurozone CPI came in at -0.3% for a fourth straight month.

The ECB maintained its interest rate and bond-buying levels at this week’s policy meeting. ECB President Lagarde acknowledged that Eurozone GDP for Q4 would likely be negative, but said that growth was expected to rebound in 2021. PMI reports showed that the manufacturing sector remains well in expansionary territory, but the services sector is in a state of decline, with readings below the 50-level which separates contraction from expansion.

In the UK, inflation improved to 0.6% in December, up from 0.3%. CBI Industrial Order Expectations and GfK Consumer Confidence remained deep in negative territory, with readings of -28 and -28, respectively.

Retail Sales rebounded from a previous decline, but just barely, with a reading of 0.3%. This was well shy of the estimate of 1.4%. The December PMIs highlighted a tale of two sectors, as manufacturing came in at 52.9, indicating expansion. Services, however, continues to contract and slowed to 38.8 points.

The Bank of Canada didn’t make any moves at its policy meeting, but the Canadian dollar climbed sharply after the decision as BoC Governor Macklem made no hint at a ‘micro-cut’ in rates, and investors were relieved.

In the US, the Philly Fed Manufacturing Index climbed to 26.5 in January, up strongly from the previous reading of 11.1 and well above expectations. Unemployment claims dropped to 900 thousand, down from 965 thousand and below the forecast of 930 thousand. The week wrapped up with the Manufacturing PMI, which rose to 59.1, up from 56.5. This was its highest level since May 2007 and it points to strong expansion.

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