G10 FX Week Ahead: Reading Between The Lines

Bank Note, Euro, Bills, Paper Money

Investors will focus on policy meeting minutes from the Fed and the ECB next week in search of hints that the first one has started discussing the timing of tapering and the second one is planning to thwart EUR strength. Meanwhile, progress on the US fiscal stimulus side may still offer support to risk assets and keep the dollar upside limited.

USD: FOMC minutes may be the highlight of a slow week

 

Spot

Week ahead bias Range next week 1 month target

DXY

90.7240

Neutral 90.0000 - 91.0000 90.0000
  • After a quiet start to the week given Monday’s US public holiday and the China New Year, the focus will return to prospects of US stimulus and what the Fed is going to do about it. The stimulus plan will still be in the committee stage this coming week before going to a full vote week commencing 22 February. The plan’s passage is seen as reasonably smooth, suggesting US equities remain supported on dips. In terms of the Fed reaction, Wednesday sees the release of the FOMC minutes. There is a slight risk of upset in the bond market should ‘a few members’ want to discuss the appropriate timing of the withdrawal of stimulus – though it does seem clear from Powell’s remarks that it is far too early to be discussing this. On the data front, January retail sales and Industrial Production should come in on the strong side perhaps driving the dollar to its strongest levels of the week Wednesday into Thursday.  
  • The US retail investor frenzy should come back into focus as well. Thursday sees key participants in GameStop volatility testify to the House Financial Services Committee. It will be a case of those defending the democratization of finance running up against allegations of market abuse. More fuel for the fire could have been provided earlier in the week on Tuesday when hedge funds reveal 13F filings for positioning in 4Q20. These could provide fresh insights into large investor shorts and provide fodder for the Reddit community. 

EUR: Minutes to reveal the ECB’s plan to thwart EUR strength?

 

Spot

Week ahead bias Range next week 1 month target

EUR/USD

1.2088

Neutral 1.2050 - 1.2200 1.2200
  • EUR/USD has been trading very narrow ranges over recent days and that may continue through the early part of week. Pressure may emerge around the release of the FOMC minutes, but perhaps 1.2050 might be enough of a correction. In terms of European inputs, the coming week will see Eurozone 4Q GDP (expected at -0.7% QoQ), minutes of the 21 January ECB meeting and the first look at the February PMIs for the region. On the minutes, the key focus will probably be the ECB’s reaction to EUR strength and whether it would choose more QE or depo rate cuts to address it. With the market somewhat desensitised to this debate and already toying with pricing a depo rate cut over the next twelve months, we doubt that this discussion in the minutes would have much impact on the EUR or money markets – but it’s certainly an event risk to brace for.
  • As to the PMIs, consensus seems reasonably pessimistic – e.g. Eurozone composite PMI expected at 48.0. As yet there are no signs of a lift-off in the European vaccine roll-out. However, the situation could change over the next month and we are not big subscribers to the ‘US exceptionalism’ argument for a weaker EUR/USD.
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