This will be a busy week for the forex market. There are three central bank meetings, U.S. retail sales, New Zealand Q4 GDP, Australia’s employment report and Canadian retail sales scheduled for release. The main focus will be the Federal Reserve’s monetary policy announcement, but every one of these events could have meaningful impact on currencies that could lead to interesting cross moves.
Investors have a lot of questions for the Fed. The last time the central bank updated its forecasts was in December, and a lot has changed since then. Fresh lockdowns were put into place during the holidays but many of those restrictions have been eased after more than 20% of the population received at least one COVID-19 vaccine shot. The outlook brightened significantly over the past few months, so at minimum the economic projections will need to reflect that. Growing price pressures should also lead to upgraded CPI forecasts. But two big questions remain: Is the latest rise in yields worrying the Fed? And how will the dot plot forecast for interest rates change? Chairman Jerome Powell made it clear in recent comments that he’s not worried, but how long can U.S. policy-makers remain cool if yields continue to shoot higher?
Even if Powell continues to downplay the move in yields, the dot plot will most likely edge upwards. An when that is combined with higher economic projections, the U.S. dollar should extend its climb. If it falls, we expect bargain hunters to swoop in quickly. Tomorrow’s retail sales report will play an important role in setting expectations for Wednesday’s rate decision. Currently, economists are looking for spending to contract in February after a strong January. However, higher gas prices, an uptick in average hourly earnings growth along with a very strong jobs report supports a positive surprise.
The Bank of England is also expected to leave monetary policy unchanged this week, but the big question for the BoE is the timing of rate hikes. Although the economy is improving and the UK is leading in vaccine rollout, the volatility in the bond markets and rise in yields takes a rate hike off the table. Since the start of the year, we’ve seen 10-year rates rise from 0.15% to 0.85% this morning. While this is still very low, the BoE may share the ECB’s concerns about the speed of the rise in yields.