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Weekly Trading Forecast: NFPs and RBA Rate Decision Key FX Catalysts This Week

Monetary policy has proven the Forex market’s top driver the past six months. That puts this week’s NFPs a market-forecasted RBA rate cut in the spotlight.

US Dollar Forecast– Dollar Breaks Bullish Record but Momentum Facing Headwind

When is ‘in-line’ a source of fundamental strength – when the economy/market/asset is already positioned as a leader.

Japanese Yen Forecast – Japanese Yen Likely to test Major Levels on Key Week Ahead

The Japanese Yen remained near-motionless against the US Dollar, but key events in the days ahead suggest the USDJPY could finally break its tight consolidative range.

British Pound Forecast – GBP/USDPreserves Bearish Momentum Ahead of BoE Meeting

The Bank of England (BoE) interest rate decision may have a limited impact on GBP/USD as the central bank is widely expected to preserve its current policy at the February 5 meeting.

Australian Dollar Forecast – Australian Dollar May Rebound as RBA Disappoints Rate Cut Bets

The Australian Dollar may launch a rebound if the RBA opts against a rate cut and maintains neutral guidance at its upcoming policy meeting.

Weekly Trading Forecast: NFPs and RBA Rate Decision Key FX Catalysts This Week

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Dollar Breaks Bullish Record but Momentum Facing Headwind

Dollar Breaks Bullish Record but Momentum Facing Headwind

Fundamental Forecast for Dollar:Neutral

  • The US Dollar has advanced for seven consecutive months through January – a record back to the Gold Standard
  • NFPs and the PCE inflation indicator will further stir hawkish Fed expectations, but the theme may be mature
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When is ‘in-line’ a source of fundamental strength – when the economy/market/asset is already positioned as a leader. That was the case with the Dollar this past week. Both the FOMC rate decision and US 4Q GDP resulted in status quo outcomes that cemented positions of strength. In turn, the reaffirmation would secure the US Dollar’s seventh consecutive month of advance. That is a record run for the currency going back to the true end of the Gold Standard in the 1970s. An advantage for growth, yields and safety will offer strong support for the Greenback over the medium term. However, this is far from an infallible fundamental backdrop. Should data rein rate hike speculation in or risk aversion undermine speculative interest in dollar-assets, the currency could face a healthy correction.

Amongst the fundamental themes that have leveraged the most strength from the Greenback over the past six months, the relatively hawkish bearing for the Fed has arguably proven the most productive driver. These past weeks have furthered that view. Following the introduction of QE in the Eurozone and a tangible dovish shift from the BoJ, BoE, RBNZ and BoC; the US data reinforced the Fed’s contrast. The FOMC rate decision refused to offer the dovish tone stimulus dependents were hoping for. Meanwhile, the GDP figures cooled while keeping a pace of healthy expansion and a range of Fed officials shaped support for a timely hike.

Moving forward, monetary policy speculation will remain a rudder for the Dollar. However, given the Fed is already sporting a significant premium over its major counterparts – swaps are pricing in 41 bps worth of hikes over the next 12 months and its closest peer in the BoE is looking at 6 bps – this theme may require significantly more fuel to generate gains. That is not to say that there isn’t untapped potential on this theme. Considering Fed Fund futures are still projecting a rate hike towards the very end of the year and a pace thereafter much slower than the FOMC itself expect, there is still potential in this current. It is just requires a stronger jolt to convince the skeptics.

We will confront a few high-profile event risk items that may try their hand at moving the market in the week ahead. On Monday, the Fed’s preferred inflation indicator (the PCE) for January is due. The headline, year-over-year figure is expected to slow to a five-year low 0.8 percent on the back of energy prices; but the FOMC has already tempered the impact a short-term slowdown could have had on the market with a focus on core and ‘medium-term’ time line. Subsequently, the data could carry a greater impact from an upside surprise rather than a downside. Through the week, Fed speak will help build a consensus of where the Committee stands on timing. Bullard, Mester, Rosengren, Lockhart and Kocherlakota are on tap.

Top event risk is the week-ended January NFPs. The net change in payrolls isn’t nearly as important as the ‘qualitative’ figures. The jobless rate has already touched past year milestones for rate hikes – a few years ago, then Chairman Ben Bernanke tied a first rate hike to an unemployment rate of under 6.5 percent. It is currently 5.6 percent. Perhaps the inflation aspect of the labor data is the lynchpin. Wage growth has struggled to catch traction. A particularly weak showing here, on the other hand, could reinforce the more distant timeline the market has on hikes and instead lead to a downgrade in FOMC forecasts at the March meeting.

Monetary policy is the engaged fundamental driver at the moment, but it is important for Forex traders not to take their eyes off of systemic investor sentiment. In the ‘risk on’ position, progress is slow and struggles to draw in the entire market. However, should full scale ‘risk aversion’ strike, conviction will span the financial system. As momentum picks up, the Dollar will see its haven appeal swell. Yet, in the early stages of such a dynamic shift, the same yield curve appeal the currency cultivated these past months could lead to capital outflow. Should sentiment turn, the Greenback’s bearing will depend on how hot the fire is.

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Australian Dollar May Rebound as RBA Disappoints Rate Cut Bets

Australian Dollar May Rebound as RBA Disappoints Rate Cut Bets

Fundamental Forecast for Australian Dollar: Neutral

  • Oil-Driven Drop in Inflation Readings Fuels Interest Rate Cut Bets
  • Australian Dollar May Bounce if RBA Opts Against Dovish Posture
  • Help Find Key Australian Dollar Turning Points with DailyFX SSI

The Australian Dollar descended to the lowest level in nearly six years against its US counterpart last week. A deteriorating monetary policy outlook looked like the leading culprit behind the move: traders are now pricing in 61 basis points in easing over the coming 12 months (according to OIS-based estimates compiled by Credit Suisse), making for the most dovish lean in traders’ expectations since early May 2013.

Furthermore, investors seem increasingly convinced that the start of the easing cycle is already at hand, with the implied probability a 25 basis point reduction at next week’s RBA meeting swelling to 65 percent. That is the first central bank sit-down to carry a greater-than-even chance of a reduction in borrowing costs in 18 months.

Fading realized and expected inflation readings seem to be behind building rate hike bets. Data published last week showed the benchmark year-on-year CPI growth rate slowed to 1.7 percent in the fourth quarter, the weakest since mid-2012. Meanwhile, Australia’s one-year breakeven rate – a measure of expected inflation derived from bond yields – has tumbled to project prices will be expanding at a pace of less than 1 percent by early 2016. That is a far cry of the RBA’s 2-3 percent objective.

The likelihood that the central bank validates the markets’ pro-stimulus posturing depends on its view of the forces bearing down on inflation. Not surprisingly, a formative factor has been the sinking price of oil. Indeed, the aforementioned CPI report showed the “transport” sub-group of index accounted for the largest downdraft in the fourth quarter, of which the most significant contribution was made by a 6.8 percent slide in the price of automotive fuel.

Faced with similar circumstances, some central banks have appeared sanguine. The Federal Reserve and the Bank of England have both chalked up recent disinflation to transitory forces that don’t necessarily have a strong bearing on medium-term price stability. Others have gone the other way: the RBNZ conspicuously backed off the hawkish rhetoric on display as recently as December in last week’s policy announcement.

Leading surveys of activity growth in the manufacturing and services sectors point to some loss of momentum since the second half of 2014 but the economy’s overall trajectory seems to remain positive. Realized data outcomes have also increasingly outperformed relative to consensus forecasts since the last RBA outing in December. If this encourages the RBA to look through near-term price declines and fall in with the Fed/BOE side of the argument – catching markets off-guard with another neutral policy statement – a swift Aussie Dollar rebound is likely in the cards.

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GBP/USD Preserves Bearish Momentum Ahead of BoE Meeting

GBP/USD Preserves Bearish Momentum Ahead of BoE Meeting

Fundamental Forecast for GBP: Neutral

The Bank of England (BoE) interest rate decision may have a limited impact on GBP/USD as the central bank is widely expected to preserve its current policy at the February 5 meeting.

According to a Bloomberg News survey, all of the 41 economists polled anticipate the Monetary Policy Committee (MPC) to retain a wait-and-see approach, and the central bank may once again refrain from releasing a policy statement as it remains in no rush to normalize monetary policy. Even though BoE Governor Mark Carney continues to prepare U.K. households and businesses for higher borrowing-costs, the committee may further delay its normalization cycle especially as price growth undershoots the 2% target.

With that said, the BoE may curb its economic assessment while delivering the quarterly Inflation report on February 12, but we may see a growing number of MPC officials show a greater willingness to raise the benchmark interest rate over the medium-term as the central bank anticipates a stronger recovery to take hold in 2015. In turn, the ongoing improvement in the labor market may continue to encourage expectations for faster wage growth, and the central bank may sound more upbeat this time around as it sees weaker energy prices as a net positive for the U.K. economy.

Nevertheless, GBP/USD may continue to carve a string of lower-highs in the week ahead as market participants speculate the Federal Reserve to normalize monetary policy ahead of its U.K. counterpart, and the pair remains at risk for a further decline over the near-term as the Relative Strength Index (RSI) largely preserves the bearish momentum carried over from the previous year.

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Japanese Yen Likely to test Major Levels on Key Week Ahead

Japanese Yen Likely to test Major Levels on Key Week Ahead

Fundamental Forecast for Japanese Yen: Neutral

The Japanese Yen remained near-motionless against the US Dollar, but key events in the days ahead suggest the USDJPY could finally break its tight consolidative range.

A highly-anticipated US Nonfarm Payrolls data print could ultimately provide the spark necessary for a larger Dollar break versus the Japanese Yen, and current signs favor the downside on the USDJPY and broader JPY pairs. Indeed we recently highlighted heavily one-sided retail FX trader positioning as a key reason the Dollar could break lower against key counterparts. A sharp drop in US interest rates and Treasury Yields may likewise keep downside pressure on the yield-sensitive USDJPY absent a material reversal of trends. Thus all eyes turn to the highly-market-moving NFPs print as it could potentially set the stage for a larger USD correction.

There is comparatively little foreseeable economic event risk out of Japan and as such eyes will remain on the US economy and broader market sentiment. The correlation between the USDJPY and the Nikkei 225 index has weakened notably as of late; recent gains in Japanese equities have not been enough to lift the exchange rate. Yet a further rise in equity market volatility would likely restore said link, and we’ll keep a close eye on global equity markets as the US S&P 500 registers its second-consecutive monthly decline. Continued losses could be enough to send the USDJPY through key support.

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AUD/USD Holds Monthly Low Ahead of RBA- Gold Tests Former Support

Talking Points:

- AUD/USD Holds Monthly Low Ahead of RBA Interest Rate Decision.

- Gold Fails to Retain Bullish RSI Momentum- Former Support in Focus.

- USDOLLAR Topside Targets Still Favored Despite Weaker-Than-Expected 4Q GDP.

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AUD/USD

AUD/USD Daily Chart

Chart – Created Using FXCM Marketscope 2.0

  • Looks as though AUD/USD will hold the January low (0.7718) ahead of the Reserve Bank of Australia (RBA) February 2 meeting, but remains at risk for a further decline as the Relative Strength Index (RSI) holds in oversold territory.
  • RBA is largely anticipated to keep the benchmark interest rate on hold at 2.50%, but seeing speculation for a rate cut amid the global easing cycle.
  • DailyFX Speculative Sentiment Index (SSI) shows retail crowd remains net-long AUD/USD, but seeing the ratio narrow going into February as it currently stands at +1.51.

XAU/USD

XAU/USD Daily Chart

  • Gold remains vulnerable to a further decline after failing to close above $1301 (50% retracement); near-term top in place?
  • As the RSI fails to preserve the bullish momentum carried over from back in November, the precious metal looks vulnerable to a further decline especially if it fails to close above 1.270 (50% expansion) going into February.
  • Break/close below $1250 should expose the former resistance zones around $1227 (23.69% expansion) to $1231 (78.6% retracement).

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Read More:

GBPNZD – Symmetry In Motion

USD/CAD Overloved?

USDOLLAR(Ticker: USDollar):

AUD/USD Holds Monthly Low Ahead of RBA- Gold Tests Former SupportUSDOLLAR Daily Chart

Chart – Created Using FXCM Marketscope 2.0

  • String of higher-lows in Dow Jones-FXCM U.S. Dollar continues to foster a bullish outlook for February even as the advance 4Q Gross Domestic Product (GDP) report falls short of market expectations.
  • Nevertheless, seeing greater willingness from Fed officials to raise the benchmark interest rate in mid-2015 as St. Louis Fed President James Bullard favors normalize monetary policy sooner rather than later.
  • As the RSI holds in overbought territory, topside targets remain favored with the next level of interest at 11,901 (78.6% expansion).

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— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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