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Week Ahead: It’s All About Inflation! – Action Forex


Last week, the RBA, BOE, and ECB all met to discuss interest rate policy.  The RBA ended their QE Program, the ECB moved from a dovish stance to a hawkish stance, and the BOE raised rates.  Will the rhetoric continue this week from central bank officials?  Also, Boris Johnson is still making headlines as he clings to his political life.  Will he be forced to resign?  US Non-Farm Payrolls were much stronger than expected for January.  The Fed will take notice! In addition, inflation data will continue this week as the US releases CPI data and the Michigan Sentiment Survey (watch the Prices Paid component).  Traders will be on high alert, watching for any clues as to whether the Fed will raise interest rates by 25bps or 50bps at their next meeting in March!

RBA – Less Hawkish

The RBA ended it’s $350 Quantitative Easing program at their meeting last week.  That’s about as hawkish as the RBA gets!  As my colleague Tony Sycamore wrote last week :

In contrast to other central banks who have recently abandoned the inflation is “transitory” narrative, the RBA’s central forecast is for underlying inflation to rise to around 3.25% in coming quarters before “declining to around 2.75% over 2023 as supply side problems are resolved, and consumption patterns normalize.”  The RBA has maintained its dovish forward guidance “the Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve.”

ECB- Hawkish

The ECB statement itself was “as expected”. In the statement, the committee “judges that realized progress on inflation is sufficiently advanced to be consistent with 2%, although it may also imply a transitory period in which inflation is moderate above target. “  However, during the press conference, Christine Lagarde noted that inflation surprises caused unanimous concern for the governing council and that inflation risks are tilted to the upside.  But it was after the press conference when the ECB was most hawkish.  ECB “sources” stated that the ECB is said to prepare for potential March policy re-calibration, to consider end of APP net buying possibly in Q3, and that it agrees it’s sensible not to exclude a 2022 rate hike.

BOE- Most Hawkish

Just as with the ECB, the BOE statement on monetary policy was “as expected”, as the committee raised the key interest rate by 25bps to 0.50%.  However, the hawkish part began with the vote: 5-4 in favor of only hiking 25bps.  That means that 4 of the 9 members voted for a 50bps rate hike!  This took markets by surprise and the Pound went bid.  In addition, during the press conference, Governor Bailey said that more rate hikes are to come, although he also said not to assume that the BOE was on a long series of rate hikes.

Boris Johnson

Boris Johnson is hanging on to his political career by a thread.  After the Susan Gray report indicated that there were serious flaws in leadership due to “partygate”, four advisors resigned after a false claim that the leader of the opposition failed to prosecute child sex abuser. There have been many calls from the opposition for Johnson to resign, and even some from within his own party, however he refuses to do so.  Traders will be watching to see if Johnson finally caves this week.

Earnings

Earnings have been all over the place this season.  Highflyers NFLX and FB guided lower and their stock paid the price.  On the other hand, AAPL and AMZN had much stronger earnings and their stock prices rallied.  As Earnings season rolls, some large cap and bell-weather stocks will be reporting this week.  Watch guidance from these companies to see if they expect higher interest rates to hurt their bottom lines.  Some of the more important companies to report this week are as follows:

AMGN, SPG, PFE, PTON, BP, DIS, CVS, UBER, TWLO, KO, PEP, AZN, TWTR

Economic Data

Non-Farm Payrolls from the US were strong on Friday at +467,000. Average Hourly Earnings were strong as well, at 0.7%.  Note that the Fed is looking for wages to rise with inflation, however it doesn’t want earnings to grow too fast.  It is often a slow data week during the second week of the month and this week is no exception.  The highlight of the week will be US CPI on Thursday.  Fed Chairman Powell said that the next move from the Fed will be data dependent.  If this print is stronger than the expected 7.3%, it may give the Fed reason to hike 50bps at the March meeting.  Also watch the Prices Paid component of the Michigan Consumer Sentiment Index to be released on Friday.  Other important economic data due out this week is as follows:

Monday

  • Australia: Retail Sales Final (DEC)
  • China: Caixin Services PMI (JAN)
  • Germany: Industrial Production (DEC)
  • UK: Halifax House Price Index (JAN)

Tuesday

  • Australia: NAB Business Conditions (JAN)
  • Canada: Trade Balance (DEC)
  • US: Trade Balance (DEC)
  • IBD/TIPP Economic Optimism (FEB)

Wednesday

  • Australia: Westpac Consumer Confidence Change (FEB)
  • Germany: Trade Balance (DEC)
  • Mexico: CPI (JAN)
  • Canada: BOC Governor Macklem Speech
  • Crude Inventories

Thursday

  • Japan: Unemployment Rate (JAN)
  • Japan: PPI (JAN)
  • Australia: Building Permits Final (DEC)
  • US: CPI (JAN)

Friday

  • New Zealand: Business NZ PMI (JAN)
  • Australia: Consumer Confidence Expectations (FEB)
  • Germany: CPI Final (JAN)
  • UK: GDP Growth Rate Prel (Q4)
  • UK: Industrial Production (DEC)
  • UK: Industrial Production (DEC)
  • US: Michigan Consumer Sentiment Prel (FEB)

Chart of the Week: Daily WTI Crude Oil

Source: Tradingview, Stone X

WTI Crude Oil is cruising, up another nearly 6.0% this week.  The black gold commodity has been moving higher since the beginning of the pandemic and has reached its highest level since September 2014.  While on the move, WTI had put in a double bottom along the way.  Price reached the second low of the pattern on December 2nd, 2021 near 61.87 and reached a high of 93.14 on Friday.  The target for the double bottom is the height from the double bottom low to the neckline, added to the breakout above the neckline. In this case the target is near 108.30.  Will price reach the target?

On Friday, WTI broke through the 127.2% Fibonacci extension from the highs of October 26th, 2021 to the lows of December 2nd, 2021, near 91.62, and traded to the upward sloping trendline dating to March 8th, 2021, near 93.15.  If price moves above the trendline, there is a confluence of resistance at that the 161.8% Fibonacci extension from the same timeframe and horizontal resistance from June 2014, between 98.95 and 99.56.  Above there, price can move to the double bottom target near 108.30 and the 2013 highs at 112.21.  If price falls below the previously mentioned 127.2% Fibonacci extension, horizontal support is at the 88.82, then the double bottom neckline at 85.39.  Below there, price can fall to the January 24th lows of 81.94.

After a volatile week with key central bank meetings and economic data, this week headlines may…



Read More : Week Ahead: It’s All About Inflation! – Action Forex

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