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Week Ahead Fed’s Yellen, US Sales and Inflation in Focus

U.S. President Donald Trump pledged on Friday to announce a “phenomenal” tax reform. Most of the dollar gains after the surprising election win came with the end of political uncertainty and promise of fiscal stimulus and infrastructure spending. The first three weeks of the Trump administration had not made much inroads on his pro-growth agenda, favouring instead an “America first” protectionism which have weakened the USD. His comments on Friday put the reflation trade back in focus. A faster pace of economic growth in the U.S. would be accompanied by higher interest rates as the Fed keeps the economy from overheating.

Fed Chair Janet Yellen will testify before the Senate Banking Committee on Tuesday, February 14 at 10:00 am EST (3pm GMT). With limited appearances since the much awaited interest rate hike in December, Yellen’s take on the U.S. economy will be followed closely by investors. Fed members have given mixed signals on way the central bank should do next and the CME FedWatch tool shows the market views a 86.7 percent probability of the rate staying put in March and dropping below 50 percent in June. This could change as Trump gives more details on tax reform and infrastructure plans. The resignation of Fed governor Daniel Tarullo also opens the door for Trump to reshape the central bank going forward.

The mixed U.S. non farm payrolls (NFP) report showed a strong number of jobs being added (227,000), but disappointed in the monthly wage growth of 0.1 percent. Retail sales and inflation data will be released on Wednesday, February 15 at 8:30 am EST (1:30 pm GMT). Sales in the U.S. are expected to continue growing as lower unemployment and rising wages of a confident consumer base. The biggest question mark is what President Trump could do to help or hurt sales as his anti-trade rhetoric has been aimed at exporting nations that run a surplus versus the United States.

The EUR/USD lost 1.113 percent in the week. The single pair is trading at 1.0649 after rising anxiety about the French elections, Greek debt and growing concerns about the German elections. The rise of Marine LePen and her comments about repaying debt in French francs has given more credence to a French exit from the European Union. Scandals are plaguing the front runner in the polls in a possible three horse race between Francois Fillon, Marine LePen and Emmanuel Macron with voters ready to cast their ballot on April 23. A second round would be needed with probabilities favouring Macron. Even though LePen might not win, the seeds of the populist movement have been planted and will sooner or later bear fruit as they have done in other places in Europe.

The International Monetary Fund (IMF) and Eurozone lenders will meet with the Greece government to reach an agreement regarding the bailout as the same debate between austerity and funds at the fore front. Lenders demand more reforms and cuts to pensions, while Greek citizens are putting more political pressure on the government to reach a better deal as pensions have already been cut 11 times since 2010.

Gold rose 1.572 percent in the last five days. The yellow metal is trading at $1,244 as investors seek a safe haven in a week with low economic data and rising political risk. The price of gold touched highs of $1,244 to lows of $1,214 before coming back up to current levels as U.S. President Donald Trump met with Japanese Prime Minister Shinzo Abe in Washington. Given the unusual calls and meetings with other heads of state there was a lot of uncertainty on what type of welcome the Japanese PM would get specially after the release of the American trade balance showed once again the high number of Japanese imports.

President Trump mentioned the commitment between the U.S. and Japan in particular to the Pacific region. The close ties could come at the detriment of China, although Trump made sure to smooth things with the Asian giant by making clear his support for the “one China” policy.

The price of gold was lower on Friday after the political risk around the potential risks of the Trump’s administration meeting with Japan. The USD was boosted with the comment from the U.S. President to announce a major tax plan within weeks. The market was awaiting some pro-growth policy announcement after the divisive anti-trade and immigration policies of the first two weeks of the Trump era. The dollar reached a 10 day high on the back of the higher inflation expectations.

The USD/JPY rose 0.236 percent during the week. The pair is trading at 113.20 after falling to 111 ahead of the visit of the Japanese PM to the United States. The visit did reinforce the ties between the two nations specially when Donald Trump pledged that the U.S. would defend Japan in case of an attack on the islands in dispute with China. The visit has heavily anticipated by the markets as Trump had accused Japan of currency manipulation and Abe had done his homework as he came to Washington to offer more opportunities for manufacturing jobs for American workers.

Oil rose 0.364 in the last five days. The price of West Texas is trading at $53.50 after rising on Friday on the news some members of the Organization of the Petroleum Exporting Countries (OPEC) are reducing production by more of what was originally agreed in Algiers. The news brought the price of crude into positive territory before the end of the week. Oil had shrugged off larger U.S. inventories than expected due to the fact that there were encouraging sings of higher gasoline demands on the Energy Information Administration (EIA) U.S. crude stocks report released on Wednesday. The black stuff had a weak start of the week with two losing sessions until turning it around on Wednesday, regardless of the massive buildup in U.S. inventories. West Texas crude will end up at five week highs eyeing the weekly report of inventories on Wednesday.

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