It's going to be a busy week ahead with a lot of economic events. Tuesday will kick off with the prelim GDP price index y/y and the prelim GDP q/q in Japan and CPI m/m and CPI y/y in the U.S.
Wednesday in Australia RBA Gov Lowe is due to testify before the Senate Economics Legislation Committee. In the U.K we'll get the CPI data and in the euro area the industrial production m/m. In the U.S., the empire state manufacturing index and retail sales are expected.
Thursday will bring the employment change and the unemployment rate in Australia and a number of reports in the U.S.: Core PPI m/m, PPI m/m, Philly Fed Manufacturing index, unemployment claims, building permits and housing starts. A few Fed members are also expected to deliver their remarks this week.
The GDP data for Japan will be important to watch as analysts believe the economy will recover from the previous quarter's contraction due to private consumption and investment. It's possible that Japan joining the US-led tech export ban to China will negatively impact its exports. The next BoJ Governor will be appointed this week with Kazuo Ueda currently seen as the likely nomination.
In a declaration last week, he hinted that existing monetary policy is appropriate and that easing needs to continue, but those declarations must be taken with a pinch of salt as he can do something else when his term will start taking into consideration that Japan is facing high inflation. Until then we'll have one last meeting with Governor Kuroda but nothing significant in terms of monetary policy is expected.
In Australia all eyes will be on the unemployment rate as it can provide hints about future RBA policy. Employment data must show signs of deterioration for the bank to change its hawkishness. Analysts from ING expect the unemployment rate to rise from 3.5% to 3.6% which is very low based on historical standards.
Meanwhile, analysts from Wells Fargo believe the labour market data for January is likely to be solid which will make the RBA keep its hawkish tone for the coming months. They also believe that China, which is the country's most important trading partner, reopening its economy will be positive for the Australian economy and will avoid a recession this year.
The U.S. CPI data is definitely the most awaited event this week and everyone expects it to be high so only a print well above expectations would cause some concern. Headline inflation is likely to be in line with the consensus, but CPI month-over-month will increase by 0.4% according to Wells Fargo, while year-over-year CPI inflation will show signs of cooling down.
It's less likely that this month's print will change the Fed's narrative, but if inflation continues to surprise on the upside next month as well, then we could see some changes. For now, the market expects additional 25bps hikes at the next two FOMC meetings.
In the U.K. this week's inflation data will be a key factor for the next rate decision in March. The market expects another 25bps hike, but after that the Bank is likely to wait and see if inflation is really showing signs of cooling down. Headline inflation might print lower due to the softer energy prices and core inflation could cool down as a consequence of lower demand.
USD/CAD expectations
The CAD ended the week on a positive note after better than expected labour market data. The Canadian economy added 150K net gain in jobs, complicating things for the BoC which wants the labour market to cool down and wages to fall in order to achieve price stability. It's less likely that a single jobs report might change the BoC's decision to pause the hiking cycle for now, but it will be interesting to see what will happen if the trend continues.
Another potential reason for the CAD 's strength was the rise in crude oil prices after Russia announced a 500,000 BPD voluntary cut and OPEC+ signalled there are no plans for an increase from other producers. Lately there has been a disconnection between the CAD and crude, but higher crude oil prices are positive for the currency.
From a technical perspective the pair ended the week near the 1.3350 level of support. From there a correction is expected until the 1.3415 resistance. If that level holds, the next target could be 1.3275. On the upside the next levels of resistance are at 1.3465 and 1.3515.
A risk for this trade is mainly the CPI data for the U.S. which might cause a lot of volatility in the market if it prints well above expectations.
This article was written by Gina Constantin.
