MARKETS: Central banks and data back in focus this week

The Fed

In December, the Federal Reserve signaled that it may raise rates three times in 2017, however it looks certain that Wednesday’s meeting won’t be one of the three.
The U.S. economy grew at the slowest pace in five years in 2016 by only 1.6%, but another favoured indicator for the Federal Reserve, the final domestic sales number which excludes inventories and trade, expanded by 2.5% in Q4 compared to 2.1% in the previous quarter.
In contrast, consumer prices rose in 2016 at the fastest pace in five years to break above 2.0%, suggesting that the Fed’s favoured PCE data will edge closer to the 2% targeted inflation.
However, the biggest unknown factor remains to be fiscal policies and since there’s no clear roadmap yet the Fed will take no action and like us they will keep monitoring Trump’s announcements.
Since Wednesday’s interest rate decision won’t be accompanied by a press conference or economic and rate projections, it’s going to be all about the released statement. A hawkish tone that opens the door for a rate hike in the following meeting will likely give another push for the dollar, given that only 25% is being priced in for a rate increase in March.

Other central banks

Sterling traders will also be interested in Bank of England’s Super Thursday, when the U.K.’s central bank announces interest rate decision along with its quarterly inflation report. Just like the Fed, the BoE isn’t likely to take any action on Thursday, leaving interest rates and quantitative easing measures unchanged. But given that the pound has dropped by more than 15% against the dollar and around 12% on trade weighted basis since the Brexit vote – inflation expectations will probably push the central bank towards a more hawkish tone giving a reason for traders to buy the pound on dips.
The least interesting central bank meeting is going to be Bank of Japan. Although we believe that the next step is likely to be tightening monetary policy, I think it’s still very early to announce any future tightening measures. Thus, the Yen will likely take its cue from risk appetite/aversion in financial markets.

Friday’s NFP

On the data front, the U.S. is expected to have added 171,000 non-farm payroll jobs in January, up from 156,000 in December. Meanwhile, average hourly earnings are forecast to rise by 0.3% compared to 0.4% in the previous month. If the data doesn’t deviate a lot for expectations the impact on the dollar will be limited, and investors’ attention will turn back to the White House.

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