Week Ahead in FX: Strong NFP Fails to Start USD Rally

The first week of the year brought plenty of volatility as the Chinese market circuit breakers halted trading a couple of times as investors were selling off equities, causing a global rout that forced the government of China into action.

The EUR appreciated versus the USD 0.17 percent this week. The strong U.S. non-farm payrolls report posted a 292,000 new jobs were added to the economy in December. The forecast called for a gain of 200,000. The big gain in the headline NFP number did not translate to wage increases which did not appreciate the dollar. The USD was temporarily boosted by the release, but as traders had already priced in a solid number and the lack of inflation signs put the EUR/USD back above 1.09.

The Bank of England will release its monetary policy summary and minutes on Thursday, January 14 at 7:00 am EST. U.S. retail sales will be the highlight for the EUR/USD as the United States struggles to convince consumers to spend heavily. It remains to be seen if the holiday discounts managed to drive store sales higher. The U.S. retail sales data will be published on Friday, January 15 at 8:30 am EST.

Bank of England on Hold Until Second Quarter of 2016

The Bank of England is expected to keep interest rates unchanged until the middle of this year. The solid pace of growth seen in 2014 was nowhere to be seen on 2015 although a lot of factors came from outside the United Kingdom it did peg back the growth expectations that put the Old Lay at one point hiking rates ahead of the Fed.

The BOE is expected to follow the Fed, but the big question is when. Governor Mark Carney reassured markets by calling the deflation threat transitory, but there has not been a strong signal inflation will set in, to be followed by a rate hike. The market expects the next move by the BOE to be a rate hike, but the timing could be more closely tied to the second U.S. rate hike.

The GBP/USD lost 0.681 percent in the last 24 hours as the U.S. employment destroyed forecasts with a print of 292,000 new jobs added to the economy. The GBP started the year on the back foot as it lost 1.49 percent versus the USD as fundamental indicators were weak, with the only positive highlight was the construction PMI at 57.8.

U.S. Retail Sales Expected to Have Grown in December

The minutes of the Federal Open Market Committee (FOMC) meeting in December were released and deflated optimism about the 4 rate hikes forecasted by the Fed. The FOMC meeting on the 22 and 23 of January will bring more details, but for now the CME FedWatch tool points to a very low possibility of a rate hike at 88.1 percent that the rate will be kept unchanged. The NFP did have a positive effect as a day before the probability of no change was higher at 90.5 percent.

After the lack of confidence from some Fed members in a clear rate hike path, the pressure will increase on the ECB to act sooner rather than later as Europe continues to fight with deflation. Emerging market turmoil, the weak price of energy and the its own failure to communicate in the December 3 meeting complicates matters for the ECB.

Retailers and credit card processors have posted information that puts the retail sales growth as high as 7 percent driven by online sales and furniture purchases. There are hints that consumers increased their gas savings this holiday season. Given the mild winter in most of the U.S. a strong sales number could boost the USD in a week with few economic releases.

Oil producers dispute to Keep Prices Low

Oil prices continue to trade below $34 as the dispute between Iran and Saudi Arabia makes it less likely there will be a supply curb by the Organization of the Petroleum Exporting Countries (OPEC) of which both are members. The emerging market slowdown has hurt energy demand and producers continue to pump at record levels taking crude to touch 12 year lows.

Forex events to watch next week:

Tuesday, January 12
4:30 am GBP Manufacturing Production Tentative CNY Trade Balance
Wednesday, January 13
10:30 am USD Crude Oil Inventories
7:30 pm AUD Employment Change
7:30 pm AUD Unemployment Rate
Thursday, January 14
7:00 am GBP MPC Official Bank Rate Votes
7:00 am GBP Monetary Policy Summary
7:00 am GBP Official Bank Rate
8:30 am USD Unemployment Claims
Friday, January 15
8:30 am USD Core Retail Sales m/m
8:30 am USD PPI m/m
8:30 am USD Retail Sales m/m
10:00 am USD Prelim UoM Consumer Sentiment

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency
trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza