FX Majors Weekly Outlook (09-13 January)

<p class=“MsoNormal“>UPCOMING
EVENTS:</p><p class=“MsoNormal“>Tuesday: Fed
Chair Powell.</p><p class=“MsoNormal“>Thursday: US
Jobless Claims, US CPI.</p><p class=“MsoNormal“>Last Friday
was incredible. Not because of another good <a target=“_blank“ href=“https://www.forexlive.com/news/us-december-non-farm-payrolls-223k-vs-200k-expected-20230106/“ target=“_blank“ rel=“follow“>NFP
report</a>, but because the <a target=“_blank“ href=“https://www.forexlive.com/news/ism-december-us-services-496-vs-550-expected-20230106/“ rel=“follow“>ISM
Services PMI</a> showed a huge dive into contractionary territory. </p><p class=“MsoNormal“>The labour
market, which is a lagging indicator, remains tight and that will keep the Fed
uncomfortable in easing monetary conditions. Remember that they see <a target=“_blank“ href=“https://www.forexlive.com/centralbank/fomc-dot-plot-and-central-tendencies-from-dec-2022-meeting-eoy-2023-48-20221214/“ target=“_blank“ rel=“follow“>4.6%
unemployment this year keeping rates at 5%</a>. </p><p class=“MsoNormal“>But if we
look at leading indicators, the Fed may very well overtighten and act too late
when unemployment starts to shoot up fast. </p><p class=“MsoNormal“>The market
took the miss in average hourly earnings and the big miss in ISM Services PMI
as good news, but I think the reaction is wrong. </p><p class=“MsoNormal“>There’s this
hope among participants that the recession will be mild or short, which makes a
deep recession an out of consensus call and something that is not priced in. That’s
where we are going in my opinion. </p><p class=“MsoNormal“>If inflation
indeed falls but the Fed keeps at it, which is what they will most likely do
based on comments from the officials and their focus on the lagging labour
market, then real rates, which is the ultimate form of tightening, will go up
and stay there when there will be a need for them to fall. </p><p class=“MsoNormal“>Historically,
the burst of asset bubbles precedes a deflationary period. For this reason, the
next thing the Fed may be fighting with is deflation. </p><p class=“MsoNormal“>Looking
ahead the Fed will hike by 25 bps at the next meeting barring any upside surprise
in the CPI report. </p><p class=“MsoNormal“>Given the
recent data, I think the USD dump out of those reports was a wrong reaction. The
market seems to be trading on the mild recession hopes at the moment. Technically,
the price action doesn’t look healthy for an upside continuation as there’s
clearly a loss of momentum.</p><p class=“MsoNormal“>Looking at
the other markets, my highest conviction is in bonds. I strongly feel that
we are about to see a strong bull market in bonds. </p><p class=“MsoNormal“>Fighting the
Fed is usually a bad idea, but at tops and bottoms, it can be done and the bond
market in my opinion will do that. The market expects rate cuts by the end
of 2023, I think rate cuts will be bigger than the market currently expects.
</p><p class=“MsoNormal“>Tuesday: Fed Chair
Powell speaks in Sweden and after the recent economic data, the market will
want to hear what the Fed Chair has to say. I don’t expect him to be on the
dovish side. He may acknowledge improvements on the inflation side but complain
about the labour market. So, all in all, I expect him to basically reaffirm
his last stance. </p><p class=“MsoNormal“>Thursday: As I
mentioned last week, I expect the labour market data now to be more important
for the market than the inflation data. We saw this new development last
week as well when the <a target=“_blank“ href=“https://www.forexlive.com/news/us-december-adp-employment-235k-vs-150k-expected-20230105/“ target=“_blank“ rel=“follow“>ADP</a>
and <a target=“_blank“ href=“https://www.forexlive.com/news/us-initial-jobless-claims-204k-vs-225k-estimate-20230105/“ target=“_blank“ rel=“follow“>Jobless
Claims</a> reports moved the market more than they used to last year.
</p><p class=“MsoNormal“>Initial
Jobless Claims are expected to come at 220K and Continuing Claims at 1708K. </p><p class=“MsoNormal“>The Headline
CPI Y/Y is expected to fall to 6.5% from the prior 7.1% and the M/M reading to
remain unchanged at 0.1%. The Core CPI Y/Y is expected to fall to 5.7% from the
prior 6% and the M/M figure to tick up to 0.3% from the prior 0.2%. </p><p class=“MsoNormal“>If the data
comes out as expected or misses, we can be sure the Fed hikes by 25 bps at the
next meeting. A beat would make the market uncertain on the magnitude of the
next hike with a possible split between 25 bps and 50 bps. </p><p class=“MsoNormal“>This article
was written by Giuseppe Dellamotta.</p>

This article was written by ForexLive at www.forexlive.com.

Go to Forexlive

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