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FX Markets Set for Volatility Bump with BOJ, FOMC, BOE, and US NFPs

FX Markets Set for Volatility Bump with BOJ, FOMC, BOE, and US NFPs

Talking Points:

- Central banks in focus as policy shifts from BOJ, BOE, and FOMC could all be on the horizon.

- Recent US economic data has been lagging, but a strong jobs report Friday could override near-term weakness.

- Among central bank meetings, BOE’s “Super Thursday” may prove the most provocative.

See the DailyFX Economic Calendar and see what live coverage for key event risk impacting FX markets is scheduled for next week on the DailyFX Webinar Calendar.

01/31 Tuesday | --:-- GMT | JPY Bank of Japan Rate Decision

The Bank of Japan meets on Tuesday against a backdrop of shifting policy expectations. Despite pledging to purchase ¥80 trillion of assets per years, the recent slowdown in short-term purchases means that the BOJ is falling behind this pace. To some, to this may conjure up concerns that, given the backdrop of a weaker Japanese Yen over the past three months, that the BOJ is tempted to step away from its more aggressive easing measures. However, given the uncertainty around US fiscal policy and rising geopolitical tensions, a premature tapering announcement would upend markets – there is a small but meaningful chance of this occurring.

Pairs to Watch: AUD/JPY, USD/JPY

01/31Tuesday | 09:00 GMT | EUR Euro-Zone Consumer Price Index (JAN A)

Euro-zone inflation is set to jump again in January, as higher energy prices continue to feed through, presenting ECB President Mario Draghi with a problem. While Draghi will be happy to see inflation returning to the euro-zone, higher import Prices could dampen domestic demand, just at a time when the EU is starting to see growth return. President Draghi will also have to get used to the sound of German officials suggesting that the central bank reign in its bond-buying program. The ECB’s ultra-loose monetary policy is starting to hurt German savers with the current level of inflation of 1.7%, biting into bond returns. The German yield curve is negative out to 7-years, while the 10-year Bund offers around 0.48%, still sharply lower than CPI. Analysts expect euro-zone inflation to jump to 1.7% in January from 1.1% in December.

Pairs to Watch: EUR/GBP, EUR/USD

02/01 Wednesday | 18:00 GMT | USD Federal Reserve Rate Decision

It’s a non-press conference, non-staff projections meeting, so the scope for action by the Federal Reserve is limited. Regardless, interest rate markets aren’t pricing in any Fed action until June 2017 at the earliest, where there is in excess of a 70% chance of a rate hike per Fed funds futures. Ultimately, given the risks surrounding Fed policy - implicitly due to the lack of clarity over the scope of changes to fiscal policy – it seems that this FOMC rate decision’s policy statement will carry additional weight.

Pairs to Watch: AUD/USD, EUR/USD, USD/JPY

02/02 Thursday | 12:00 GMT | GBP Bank of England Rate Decision – “Super Thursday”

Super Thursday will see Bank of England latest monetary policy announcement and the MPC Quarterly Inflation Report. All UK policy measures are expected to remain unchanged, while the QIR is expected to see governor Carney upwardly revise his near-term growth and inflation forecasts. Thursday’s first look at fourth-quarter GDP surprised on the upside, 0.6% against analysts’ expectations of 0.5%, confirming the UK as the fastest growing economy in the G7 in 2016. Governor Carney is also expected to warn about his limited tolerance to inflation overshoots, although the recent appreciation of sterling from its post-Brexit lows, may leave Carney with a little more flexibility than last quarters report.

Pairs to Watch: EUR/GBP, GBP/JPY, GBP/USD

02/03 Friday | 13:30 GMT | USD Change in Nonfarm Payrolls (JAN)

The key issue surrounding the January US Nonfarm Payrolls report is whether or not the US labor market will give one further indication that it is strong enough to justify a more aggressive pace of Fed tightening. Current expectations for the data are modest, with the Unemployment Rate expected to hold at 4.7%, and the headline jobs figure to come in at +168K.

The trend of +200K jobs growth per month has recently been a psychological level for markets, but Fed leaders and centrists (the Goldilocks of the Fed; not too hawkish or too dovish) tend have another number in mind. In October 2015, San Fran Fed President John Williams wrote in a research note that he believed growth of +100K jobs per month was enough to sustain the growth in the labor force and maintain the current unemployment rate. In December 2015, Chair Janet Yellen reiterated this same view. By the Atlanta Fed Jobs Growth Calculator, assuming a 4.8% longer term unemployment rate, the economy only needs +122k job growth per month to sustain that level.

Pairs to Watch: AUD/USD, EUR/USD, USD/JPY

Read more: Euro Due for More Chop as Inflation Data Point Higher; Draghi on Thursday

--- Written by Christopher Vecchio, Senior Currency Strategist, Nick Cawley, Analyst

Follow him in the DailyFX Real Time News feed and Twitter at @CVecchioFX.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.