The dollar fell back into the 7 weeks range after another disappointing job figures from the US labor department on Friday. Meanwhile, equities and high-beta FX are starting this week on a front foot. Later in the week, traders will look forward to US Inflation data amongst others.
Last week ended in losses for risk assets as investors turned attention to inflation concerns. Equities plummeted together with high-betas like Aussie and NZD. However, bonds yields had a good spell and benefitted the most among the safe havens. Gold plunged but the oil market stayed firm.
Central Banks Policies
Central banks are not turning back from their stimulus withdrawal plans. The Fed is expected to hike rates at least three times this year starting in the first quarter and perhaps in their next policy statement on January 29. The BoC, SNB and RBA are expected to follow in this manner. However, the ECB and BoJ might wait much longer. In fact, the former is not expected to hike rates this year. There are no policy statements from any of the key banks this week aside from Fed Chair Powell’s testimony on Tuesday and ECB’s Largade’s speech on Friday. Therefore, as the market takes its eyes off the central bank a bit, together with a very soft economic week (in terms of data releases), bond yield, Omicron variant and technical price actions are going to be the most useful tools for traders.
What next for the dollar after disappointing job data?
The dollar extended the price range that started in late November. The greenback fell sharply after Friday’s downbeat employment figures. The currency index couldn’t hit 96.5 after the last week’s early surges made it look inevitable. We might see a lift on the currency index again this week toward the top of the range around 96.5. However, the inflation report on Tuesday should be watched closely. The US core monthly CPI is expected at 0.4% – much lower than the previous 0.8%. We will have to see whether there will be a breakout or the range will be sustained.
Will Risk Return this week?
The volatility index is pointing downwards again at the start of the week which, if sustained, will push equities upwards. The S&P 500 is breaking out of a bearish wedge. The index, which measures the basket of the top 500 stocks in the US, is expected to hit above 4700 early in the week. Above that, we have the 4744-5755 resistance zone which could also attract the bulls.
Meanwhile, oil prices peaked again at $80 (WTI) last week after a good run of recoveries. However, it seems we will head to another bearish correction this week but the overall sentiment supports more bids for the commodity. Overall, it seems we will see some significant recoveries on risk assets in the first half of the week. However, a sentiment shift could happen quickly and traders need to be on alert.
Major Economic Events
The economic calendar is soft this week. There are no major economic events on Monday. On Tuesday, Fed Chair’s testimony will dominate headlines before Wednesday’s US Inflation reports. On Thursday, the US PPI and Unemployment claims will grace the calendar. The ECB President Lagarde’s speech on Friday might be a non-event as the bank has been crystal clear on its monetary policy direction this year. It’s therefore too early to call for a change of heart. Later on Friday, the US Core Retail Sales should be watched.