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As expected, the Bank of Japan and the ECB left their monetary policy unchanged last week. The focus of the new week will be the decision of the Fed on the interest rate (published on Wednesday at 18:00 GMT), the publication on Friday (12:30 GMT) of data from the US labor market in April. As always, the publication of a number of important macroeconomic data is expected on the beginning of the trading week and several important news are published.
The result of the previous week was the strengthening of major European currencies, as well as a fairly sharp drop in oil prices. After Tuesday, British Prime Minister Theresa May unexpectedly announced early parliamentary elections, the pound has sharply strengthened in the foreign exchange market. Strengthening the pound was accompanied by the fall of the British stock market. Following the FTSE100 index, which lost almost 2.9%, all European major stock indexes followed, which led to a sharp strengthening of the euro.
The result of the previous week was the weakening of the dollar in the foreign exchange market. After US President Donald Trump said in an interview with the Wall Street Journal that the dollar "is becoming too strong" and he would prefer the Fed to maintain interest rates at a low level, the dollar collapsed in the foreign exchange market.
Market expects inflation to print 2.2% vs 2.3% previously. UK inflation has been trending slowly up giving reason to believe that BOE soon will be publicly talk about rising interest rates. Fore that reason, better than expected CPI is likely to be positive for GBP.
Probability of more hikes from FED were higher across the board. May remains out of the picture but June and July gained most confidence and spiked from 49 % to 63% and from 56% top 70% respectively. September was up by 10% and it is now reading 80%. November and December were slightly up too. Investors will be looking for a little bit more hawkish tone from FED this week to confirm rate hike expectations for 2017 and 2018. Given strong US data, FED might be looking into adding additional hike for 2017.
3:00pm USD CB Consumer Confidence Customer confidence has been fairly strong recently but this time, the market expects it to come out a bit softer.113.9 is expected vs 114.8 previously. It is unlikely to be a market mover given the current political issues with health care on the table. 3:10pm CAD BOC Gov Poloz Speaks This could be a significant event given the recent developments in the CAD Futures market ( Speculators cover 60% of their longs ) Look for anything to confirm speculative lack of bullish sentiment in CAD.
EURUSD was trading higher post FOMC and it closed the week at 1.0736,two months high. I expect this market to continue to the upside given ECB’s positive note and bullish speculative positions this week.Last week we noticed that speculative positions are leaning towards bearishness in GBP futures. Speculators sold GBP futures and the price dropped accordingly. This week, the same bearish sentiment prevails but the price rallied and closed at 1.2389, highest in weeks. It seems like speculators hold historically extreme amount of short GBP. Market tends to reverse during these conditions.
it is clear that with the market pricing in 100% chance of tightening, investors are treading carefully. The dollar did not extend Friday's losses versus the Japanese Yen but it traded lower against sterling, Swiss Franc and the commodity currencies. What's interesting about this pullback is that it comes amidst a persistent rise in U.S. rates.
U.S. rate hike in March to pricing one in almost completely. According to Fed fund futures, the odds of a rate hike this month sits at 90%, up significantly from 40% the week prior. Sentiment could also swing the other way if next week's non-farm payrolls report is abysmal or between now and March 15th, stocks crash. Of course both of these scenarios are unlikely because while market expectations have changed recently, underlying fundamentals have not.
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