As earnings season on Wall Street hits full pace and the great and good of finance convene in Davos for the annual World Economic Forum, forex traders are looking at the first European Central Bank meeting of 2018 and the preliminary GDP prints for the final quarter of last year from the US and the UK.

World Economic Forum in Davos

Donald Trump says he’s attending and just about every other important name in world finance should be in attendance at some stage for the annual World Economic Forum in Davos.

In addition to trade, top of the agenda may well be cryptocurrencies. Bitcoin and other cryptos suffered large falls last week as the regulatory noose appeared to tighten with South Korea and China making moves to ban trading.

The Davos forum may offer policymakers the first chance to discuss a more unified regulatory approach to cryptocurrencies ahead of the G20 later in the year. Suffice to say that the cryptocurrency market is in the cross-hairs of regulators in 2018.

ECB Policy Meeting

After EURUSD hit three-year highs, the focus is on whether the European Central Bank can continue to offer support for euro bulls, or whether the usually-dovish Mario Draghi disappoints. Minutes from the most recent policy meeting gave euro bulls the edge as these showed a willingness to alter forward guidance in the early part of 2018, assuming that inflation continues to converge with the central bank’s target. This boosted demand for the euro, which advanced to three-year highs against the dollar.

But a more cautious tone from ECB officials since then has dampened the mood, while the dollar has found support again following a rout since mid-December that pushed the dollar index within a whisker of breaching the 90 handle.

While no change to rates is expected, markets are watching for any signal that the ECB is willing to discuss when it will bring its asset purchase programme to an end and what this implies for interest rates.

Bundesbank chief Jens Weidmann said current expectations for rates to rise in the middle of 2019 are realistic, but hinted that the ECB may wish to stop bond buying this year. Assumptions that the ECB will change forward guidance in the first quarter in anticipation of stopping QE this year appear predicated on core inflation continuing to improve, but there is yet not any strong signal that this is the case and many are sceptical the ECB will be able to get inflation towards target against a firmer euro and a reduction in asset purchases.

US & UK Q4 Growth Figures

Two major economies are in focus this week with the release of fourth quarter GDP figures that will define how well each performed in 2017.

US growth has jumped since Trump took office and with tax reform now passed, many see a chance that expansion can continue to accelerate. As of Wednesday (January 17th), the Atlanta Fed forecast growth of 3.3% in Q4, while the New York Fed estimated it to be closer to 4%.

Any signs that US growth is accelerating from the 3.2% seen in Q3 could support the US dollar and push Treasury yields higher. A snapback could see the dollar index retest recent lows.

UK growth will be monitored for signs that Britain’s economy is suffering following the Brexit vote. Growth has proved more resilient than some expected, but the UK does appear to be lagging its G7 peers. According to the latest estimate from the closely-watched National Institute of Economic and Social Research Britain’s economy grew by 0.6% in the final three months of 2017, which would make it the fastest pace of expansion in a year.

Earnings Season

US earnings season continues with a host of Dow components set to report Q4 results. Johnson & Johnson (JNJ), Procter & Gamble (PG), Travelers (TRV) and Verizon Communications (VZ) are due to report earnings on Tuesday. General Electric (GE) and United Technologies (UTX) are the big releases on Wednesday, while on Thursday Caterpillar (CAT), Intel Corp (INTC) and 3M Co (MMM) complete the week’s results for the Dow Jones.

Ahead of these on Monday is Netflix (NFLX). Our preview to the company’s earnings can be found here.

Bank of Japan

Markets have become highly sensitive to even the most minor signs of policy tweaks by the Bank of Japan, which convenes for its latest meeting this week.
News that the BoJ had slightly reduced the amount of longer-dated bonds it bought was greeted with a wave of selling in bond markets that pushed up yields and lifted the yen. USDJPY has approached 110, the strongest level for the yen since September last year, with pair falling below the 200-day moving average. Continued yen strength could result in the 50-day SMA moving below the 200-day, which could produce further weakness in USDJPY.

So the pressure is on governor Haruhiko Kuroda to convince markets that the exit from ultra-loose monetary policy is a long way off. But it could be tough as forex and bond markets seem to be moving in advance of any tightening, front-running central bank policy moves in a manner that we saw with the euro last year and the dollar in 2014-15.

Source: ETX Capital

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Last Updated: February 1st, 2021