Upcoming Week: Foreign Exchange Markets Prepare for Instability Amid Monetary Policy Uncertainty

In the upcoming week, attention will be on the EUR, GBP, and USD service Purchasing Managers' Index (PMI) data, alongside the European Central Bank (ECB), the Federal Reserve (Fed), and the People's Bank of China (PBoC).

Highlights

• The focus is on the meeting minutes of the European Central Bank (ECB) and the Federal Reserve (Fed) regarding their respective monetary policies.
• The preliminary private sector Purchasing Managers' Index (PMI) data for February will impact the central banks' policy objectives on Thursday.
• China resumes activities following the Chinese New Year holidays, placing attention on Beijing and the People's Bank of China (PBoC).  

The United States Dollar:

The FOMC Meeting Minutes scheduled for Wednesday are of significant interest to investors. Recent economic indicators have provided conflicting signals to both the markets and the Federal Reserve. The Meeting Minutes might reaffirm specific areas of focus, allowing the markets to adjust their expectations regarding a potential Federal Reserve rate cut in the first half of the year.

On Thursday, attention will turn to jobless claims and private sector PMI figures. The Services PMI holds particular importance, as it contributes to more than 70% of the US economy. An increase in service sector activity could lead to a reduction in expectations for a Federal Reserve rate cut in the first half of 2024. However, it's essential to consider jobless claims as well. Any unexpected rise in jobless claims could unsettle the markets and dampen expectations for no rate adjustments.

Aside from economic indicators, investors should closely monitor speeches by FOMC members scheduled throughout the week, including Raphael Bostic on Wednesday, Michelle Bowman on Wednesday, and Christopher Waller on Friday. These speeches may provide insights into the economic outlook, inflation expectations, and the trajectory of the Fed's interest rate policy.

The Euro:

Wednesday will see the release of flash consumer confidence figures for the Eurozone, which will capture investor attention. Any unexpected decline in confidence could impact demand for the EUR/USD currency pair. However, preliminary private sector PMIs for France, Germany, and the Eurozone on Thursday are likely to have a more substantial effect on the EUR/USD exchange rate.

Since the services sector accounts for over 60% of the Eurozone economy, the Services PMI carries significant weight. Investors should pay attention not only to the overall PMI figure but also to sub-components such as prices and employment. Rising price trends could lead the European Central Bank (ECB) to maintain its current monetary policy stance in the near term.

Additionally, Eurozone inflation data for January on Thursday will be crucial, as inflation remains a key consideration for the ECB's interest rate decisions. Friday will bring attention to the German economy, with the release of Q4 GDP and business sentiment figures. Any downward revisions to GDP figures or weakening business sentiment could raise concerns about an extended economic downturn.

In addition to economic data, investors should focus on ECB commentary, including the ECB Monetary Policy Meeting Minutes on Thursday and speeches by ECB President Christine Lagarde and other Executive Board members throughout the week. Any indication of delaying discussions about interest rate cuts could bolster demand for the EUR.

The British Pound:

Thursday will see the release of preliminary private sector PMIs for February in the UK, placing the spotlight on the Pound. Given that the services sector accounts for over 70% of the UK economy, the UK Services PMI will have a more significant impact. However, commentary from the Bank of England (BoE) could also influence market sentiment.

Monetary Policy Committee member Swati Dhingra is scheduled to speak on Wednesday. Recent economic indicators in the UK have been mixed, with strong labor market conditions and increased retail sales counterbalancing softer inflation data.

The Canadian Dollar:

Tuesday's release of inflation figures for January will be closely watched by investors. Higher-than-expected inflation numbers could affect expectations for a Bank of Canada interest rate cut and consequently impact the Canadian dollar. Retail sales figures on Thursday will also be important, as the Bank of Canada closely monitors demand-driven inflation trends.

Other data such as RMPI and wholesale sales figures will also be considered, but the focus will likely remain on inflation and retail sales reports. Additionally, weekly crude oil inventory numbers from the US and any stimulus announcements from China could influence sentiment toward supply and demand dynamics, affecting the Canadian dollar.

The Australian Dollar:

The Reserve Bank of Australia (RBA) Meeting Minutes on Tuesday will attract attention from investors, potentially influencing trends in the Australian dollar. Any hawkish comments from the RBA could impact near-term currency movements as investors await further inflation reports.

Wednesday's release of wage growth figures for Q4 will also be significant, as an unexpected increase in wage growth could indicate higher consumer spending and inflation driven by demand.

Private sector PMIs for February on Friday will wrap up an important week for the Australian dollar. Additionally, stimulus discussions in China and policy decisions from the People's Bank of China (PBoC) could affect market sentiment.

The New Zealand Dollar:

Wednesday will see the focus shift to inflation data in New Zealand, particularly producer input prices for Q4. Any softer-than-expected input prices could lessen expectations for a Reserve Bank of New Zealand (RBNZ) interest rate hike. Inflation remains a primary concern for the RBNZ, with expectations of rate hikes in Q1 2024.

Friday's release of retail sales figures will complete an important week for the New Zealand dollar. An increase in consumer spending could fuel demand-driven inflation and potentially influence RBNZ decisions regarding interest rates.

The Japanese Yen:

Monday's release of core machinery orders will be important for the Japanese Yen, especially following a technical recession in Q4. Any uptick in demand could affect the currency. Despite the recession, speculation persists regarding a Bank of Japan pivot away from negative interest rates by April. A worsening macroeconomic environment might prompt the BoJ to adjust its timeline for exiting negative rates.

Trade data and private sector PMIs later in the week will also be watched closely by investors. Furthermore, Bank of Japan commentary throughout the week will be significant. Any indication of plans to exit negative rates in the first half of 2024 could bolster demand for the Yen.

China:

The People's Bank of China (PBoC) will be in focus on Tuesday when it sets 1-year and 5-year loan prime rates. Rate cuts could increase demand for riskier assets. With Chinese markets reopening after the Lunar New Year holidays, investors will also pay attention to stimulus discussions from Beijing.