This Week: Central bank decisions set to trigger more volatility!

Strap yourselves in for a pivotal week in financial markets as we get rate decisions by the Fed, ECB and the BOE all within 18 hours or so of each other.

The data calendar is also chock-a-block with key top tier economic reports which may generate potential high volatility as well. These include the US monthly nonfarm payrolls and ISM, eurozone inflation and GDP, as well as several megacap tech titan earnings releases from Apple, Amazon, Alphabet, and Meta.

There’s bound to be some interesting price action for sure, in a week which features an unprecedented amount of risk events:

Monday, January 30

• NZD: New Zealand December external trade
• CNH: Mainland China markets reopen after Lunar New Year
• EUR: Eurozone January economic confidence
• IMF publishes World Economic Outlook update

Tuesday, January 31

• JPY: Japan December unemployment, retail sales, industrial production
• AUD: Australia December retail sales
• CNH: China December industrial profits, January PMIs
• EUR: Eurozone 4Q GDP
• USD: US January consumer confidence
• Exxon Mobil earnings

Wednesday, February 1

• NZD: New Zealand 4Q unemployment
• CNH: China Caixin manufacturing PMI
• EUR: Eurozone January CPI and manufacturing PMI, December unemployment
• GBP: UK January manufacturing PMI
• Brent: OPEC+ meeting
• USD: Fed rate decision
• Meta earnings

Thursday, February 2

• EUR: European Central Bank rate decision
• GBP: Bank of England rate decision
• USD: US weekly initial jobless claims
• S&P 500: Earnings from Alphabet, Apple, and Amazon

Friday, February 3

• CNH: China January services/composite PMI
• USD: US nonfarm payrolls report

 

Major central banks could set market tone for rest of the year

Certainly, the central bank interest rate decisions are already baked in by markets:

• 25bp rate hike by the Fed on Wednesday
   
• 50bps hike by the ECB on Thursday
   
• 50bps hike by the BOE on Thursday

Anything else would be a surprise.

So rather than the actual hikes, the real uncertainty lies with their accompanying communications.

 

Markets risk being surprised by still-hawkish Fed

The FOMC message could be quite strongly influenced by some of that critical data before the meeting. In turn, it could look dated by the end of the week with the US jobs report finishing off the week.

Falling inflation and signs of a weakening economy have increased the chances of smaller hikes going forward at the FOMC. Interestingly, the annual rotation of regional bank presidents with voting rights is expected to lead to a more dovish set of voters.

Crucially, the inflation peak is now behind us, but the labour market remains strong and relatively tight.

That could mean wage pressures flare up in the coming months which policymakers will be highly wary of and so may want to push back on the rate cuts priced in by markets for the end of this year.

If so, the dollar should find a bid and stocks pare their recent healthy year-to-date gains.

 

Euro may see further gains on still-hawkish ECB

The ECB is expected to remain hawkish with core inflation still very elevated and looking sticky.

With rate expectations beyond mid-2024 nearly as low as before the December meeting, President Lagarde is seen talking up rates.

Another 50bp rate hike at its next meeting in March could then get sealed which may see the euro print new cycle highs.

 

More GBPUSD upside requires BOE to stay hawkish

The Bank of England is in a slightly different spot to the other two central banks.

Although the BOE shares the same tight job market issues with the US, its very high inflation concerns are more like the eurozone.

Updated forecasts from the MPC should show a milder recession but lower inflation. Guidance is likely to be quite soft with the vote split leaning increasingly to the dovish side.

GBP/USD has held up relatively well in recent weeks but is struggling to break the mid-1.24s, where resides the 61.8% Fibonacci level from its 2022 peak to trough.

This key technical level is also acting as immediate resistance for the currency pair known as “cable”, perhaps awaiting fresh policy clues out of the BOE this week for its next big move.