Dollar Fails to Gain Traction Despite Positive Inflation Signs

US hourly wages went up 0.3% in December

The US dollar is lower against major pairs only appreciating against the CHF and the JPY. The greenback got a small boost from the release of the U.S. non farm payrolls (NFP). The US added 148,000 well below expectations but with the hourly wages rising 0.3 percent but that was not good enough to counter positive economic indicators released in Europe and the stronger jobs report in Canada.

• UK monthly manufacturing production forecasted to rise by 0.3%
• US inflation could continue positive trend after NFP
• US retail sales expected to show strong December gains

The EUR/USD advanced 0.34 percent during the week. The single currency is trading at 1.2046 after economic data in Europe supported the euro. German retail sales beat the 1.0 percent improvement forecast with a 2.3 percent advance. Inflation estimates in the EU were flat at 1.4 percent, with the core falling slightly to 0.9 percent. Although lower than expected the fall in inflation validated the guidance from the European Central Bank (ECB). Without pressure from rising inflation the ECB can keep the German and Dutch members at bay with their calls urging for a quicker end of QE. German retail sales alongside inflation data released last week does show why German policy makers are worried given the strength of the currency.

The awaited release of the U.S. non farm payrolls (NFP) did little for the US dollar as fewer than the 190,000 jobs were added (148,000) and although there were some positive signs of inflation with hourly wages climbing 0.3 percent it was not enough. Employment has been one of the strongest pillar of the US economic recovery after the 2008 crisis, but as time wears on there are fewer people available to be employed so the gains will be limited. Inflation remains subdued and the U.S. Federal Reserve is divided on the pace of rate hikes in 2018.

There is few probabilities of a rate hike in January, with a lot of the anticipation surrounding the March Federal Open Market Committee (FOMC) which will be the first of Jerome Powell as chair of the central bank.

The economic calendar for the EUR/USD will be focused on US retail sales and inflation that will be released on Friday, Jan 12 at 8:30 am EST. Inflation is expected to come in lower putting some pressure on the Fed to slow down its path of rising rates, but retail sales are anticipated to show an improvement in December.

The USD/CAD lost 1.37 percent in the last five days. The currency pair is trading at 1.2407 after Statistics Canada released the December jobs report. The Canadian unemployment rate fell to its lowest reading in 40 years on Friday. The number of jobs added to the economy in December was 78,600 much higher than the forecasted 1,000. The monster gain has prompted Canadian financial institutions to update their forecasts for the January policy meeting of the BoC with the majority expecting a rate hike. The loonie continued rising after the slow start to the year of the US and the boost from higher oil prices.

The solid job report is another sign that the Canadian economy is going strong. Governor Poloz has not denied that interpretation but he was also careful to keep a neutral tone when he spoke in December. The market has now moved to predicting a rate hike in the January 17, but it will be Stephen Poloz who makes the final call. Heavy in his mind will be the fate of NAFTA. Poloz has shown that he is not afraid to be proactive as he cut interest rates twice in 2015 to shield the Canadian economy from the worst of the oil price crash. With the efforts form the Organization of the Petroleum Exporting Countries (OPEC) and strong growth, those 50 basis points were added back to the benchmark rate.

NAFTA remains a bigger puzzle than the oil market given that its fate its tied to the Trump Administration. The victory of the tax reforms is now in the past and NAFTA could provide a rolling thunder for the administration as ending the agreement could be done unilaterally by the White House. The effect is hard to quantify for Canada and even the United States which is why Poloz has chosen not to speculate until a reaction is needed. The decision of the BoC will take that uncertainty into consideration so it would also not a surprise if the central bank decides to stand pat, despite the strong indicators of late.

The Canadian economic calendar will be brief with a focus on housing. The Bank of Canada (BoC) will release its business outlook survey on January 8 at 10:30 am EST. Housing starts will be published on January 9 at 8:15 am EST, building permits on January 10 at 8:30 am and the New House Pricing Index (NHPI) on January 11 at 8:30 am EST.

The price of West Texas Intermediate is trading at $61.45. The oil rally is finding it hard to continue as US production is ramping up. The Organization of the Petroleum Exporting Countries (OPEC) agreement with other major producers stabilized prices and its extension to the end of the year set the foundation near the $50 price level, but disruptions based on weather and geopolitical events have driven the price to 2 year highs.

Iranian unrest, storms in the US and the outage of the Forties pipeline are keeping prices at current levels, but demand has remained stagnant and prices could fall once again once those temporary issues are sorted and higher production from Brazil, Canada and the US threatens to put downward pressure on the price of energy.

US crude inventories to be release on Wednesday, January 10 at 10:30 am EST will shed more light on demand and will impact the price of a barrel of oil as US shale production is ready to kick into a higher gear in 2018.

Market events to watch this week:

Wednesday, January 10
4:30am GBP Manufacturing Production m/m
10:30am USD Crude Oil Inventories
7:30pm AUD Retail Sales m/m
Thursday, January 11
8:30am USD PPI m/m
8:30am USD Unemployment Claims
Friday, January 12
8:30am USD CPI m/m
8:30am USD Core CPI m/m
8:30am USD Core Retail Sales m/m
8:30am USD Retail Sales m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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