USD:  Waiting on Fed Chair Yellen

Fed Chairman Janet Yellen will be presenting her monetary policy report to the Senate Banking Committee on Tuesday.  Chairman Yellen’s testimony will likely set the dollar’s direction this week.

There’s considerable uncertainty on when the Fed is planning to start normalizing its monetary policy and raise the overnight interest rates. The dollar could give up its gains if Chairman Yellen reports that the economy is at risk of a measurable slowdown this year due to a strong dollar and falling exports.

This week is packed with major economic report releases that can move the dollar. The February Consumer Confidence Index will be released on Tuesday, followed by the January Consumer Inflation and Durable Goods Orders reports on Wednesday.  The week will cap with the release of a revised look at the 4th quarter Gross Domestic Product estimate.  The market will be looking closely at these reports to see if the Fed’s somewhat tentative assessment of the economy is merited.

EUR: Greek bailout crisis could reignite

The euro managed to regain its footing on Friday afternoon after news of a loan extension deal between the Eurogroup and Greece.  The euro was under pressure all week and, at one point on Friday, plunged to a new low of 1.1275.

That said, the euro is not out of trouble yet. Greece will be proposing specific austerity measures today to the Eurogroup to be implemented during the 4-month loan extension period. If the Eurogroup rejects the proposal, then the Greek bailout crisis could reignite and push the euro back down below 1.1300.

Tuesday, the January Consumer Inflation report will be released.  If inflation remains near a deflationary level then the euro could slip further in anticipation of extended bond buying efforts by the European Central Bank (ECB).  The ECB President will give two speeches – Tuesday and Wednesday – on the bank’s monetary policy and the ongoing Greek debt crisis.  The ECB will also release its long term refinance report on Thursday, and this report will provide updated information on the current health of EU banking and credit conditions.

 

GBP: The pound lost some appeal

The pound stumbled for the first time in many weeks on Friday, partly in reaction to a disappointing January retail sales report on Friday.  The January sales dipped 0.3 percent from December.

Additionally, the pound may have also lost some of its appeal among international investors who are seeking higher returns as Bank of England’s Ian McCafferty expressed his concern about the currency’s recent strength last week. This is quite notable as Governor McCafferty is a relative hawk at the Monetary Policy Committee, having been one of the two dissenters voting in favor of hiking rates from August to December last year.  Higher interest rates tend to strengthen the currency.

The February survey of 24 UK business sectors was released this morning.  This will be followed by a preliminary 4th quarter Gross Domestic Product report on Friday.

 

CAD: Takes plunge after a weak retail sales report

The loonie plunged on Friday after a much weaker than anticipated retail sales report.  The retail sales tumbled 2.0 percent in December following an unrevised 0.4 percent gain in November.

The drop in December was the worst month-on-month retail sales decline since April 2010.  Sales fell by 5.6 percent for clothing and accessories stores and 9.2 percent at electronics and appliance retailers. In fact, the sales decline was broad and included nine of eleven categories making up 71 percent of retail trade.

The December retail sales report suggests falling oil and commodity prices are hurting consumer spending – particularly in those regions which rely heavily on oil and commodity exports.  Therefore, most analysts are expecting the Central Bank of Canada to lower the key interest rate in their next meeting in March.

Bank of Canada Governor Stephen Poloz will be giving a speech on Tuesday.  The market is expecting the speech to strongly hint of the March rate cut.  The January Consumer Inflation report will be released on Thursday.

 

AUD: Remains under pressure

The Aussie dollar remains under pressure as depressed commodity prices continued to dampen the economy’s outlook.

The Reserve Bank of Australia made it clear in their January meeting minutes, released last week, that the Aussie dollar is out of alignment with the economy and calculated to be too strong relative to its macro and trade conditions.  Therefore, most traders expect the bank to cut its overnight cash rate next week from its current record low level of 2.25 percent.

There are no major economic reports or events scheduled for this week.  Therefore, the Aussie dollar is expected to remain close to recent bottom this week.

Have a great day!