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Talking Points:

- The first week of 2018 should see liquidity conditions slowly come back to normal, although that won’t be the case in full until next week.

- The December Euro-Zone CPI and December US Nonfarm Payrolls reports on Friday headline the calendar through the rest of the holiday-shortened week.

- Retail trader positioning is pointing to further rough days ahead for the US Dollar as trading gets under way in 2018.

Join me on Mondays at 7:30 EST/12:30 GMT for the FX Week Ahead webinar, where we discuss top event risk over the coming days and strategies for trading FX markets around the events listed below.

01/05 Friday | 10:00 GMT | EUR Euro-Zone Consumer Price Index (DEC)

Inflation remains stubbornly low in the Euro-Zone, with neither the core nor the headline figure near the European Central Bank’s +2% medium-term target. At the December ECB policy meeting, President Mario Draghi made clear that no rate hikes are to be expected so long as inflation remains below the central bank’s target and while its asset purchase program is still under way. Incoming inflation figures point to price pressures unchanged at +1.4% y/y in December, down one-tenth of one percent from the reading in November. With that said, one market measure of inflation – the 5-year, 5-year inflation swap forwards – closed 2017 out at a yearly high, suggesting that momentum is building for higher inflation in the Euro-Zone.

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

01/05 Friday | 13:30 GMT | CAD Net Change in Employment & Unemployment Rate (DEC)

The November Canadian employment report was a stunning surprise, with the economy having added +79.5K jobs and the unemployment rate dropping to fresh cycle lows at 5.9% - a sharp decline from the 6.2% rate seen in October. Yet after the exuberance, it seems that a bit of ‘give back’ is due: economists polled by Bloomberg News suggest that the Canadian economy neither added nor shed jobs in December, and as a result, with labor market participation still rising, the unemployment rate is due to tick higher to 6.0%. Another dramatic print would have stark implications for the timing of the next Bank of Canada rate hike, currently pegged for March 2018 per overnight index swaps.

Pairs to Watch: CAD/JPY, USD/CAD, Crude Oil

01/05 Friday | 13:30 GMT | USD Change in Nonfarm Payrolls & Unemployment Rate (DEC)

The main issue for the US Dollar when it comes to the December US Nonfarm Payrolls report is whether or not the US labor market will remain strong enough to justify a more aggressive pace of Fed tightening this year. After all, the Fed has suggested it will hike rates around three times in 2018, whereas rates markets are pricing in one to two hikes (at maximum, depending on the measure used). Heading into this Friday’s data release, current expectations for the data are modest, with the unemployment rate expected to hold at 4.1%, and the headline jobs figure to come in at +188K.

According to the Atlanta Fed Jobs Growth Calculator, the economy only needs +109K jobs growth per month over the next 12-months in order to sustain said unemployment rate at its current 4.1% level.

FX Markets Start the New Year with Euro-Zone CPI, US NFP in Sight

Pairs to Watch: EUR/USD, USD/JPY, DXY Index, Gold

Read more: Volatility Won’t Stay Low Forever: Political Risks Set to Rise in 2018

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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