Talking Points:

- Liquidity conditions continue to normalize as the calendar turns into the first full trading week of 2018; MiFID II adoption may be holding back trading volumes, however.

- There are only four ‘high’ importance data releases on the calendar this week, two from each China and the United States.

- 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.

01/10 Wednesday | 01:30 GMT | CNY Chinese Consumer Price Index (DEC)

Chinese consumer prices rose by +1.7% y/y in November, continuing the inter-year rebound after setting a two-year low in inflation in February (+0.8%). The December reading is due to show further improvement, up to +1.9% y/y. Nevertheless, price pressures remain muted relative to the start of 2017, when CPI was +2.5% y/y in January. Thanks to stabilizing base metal prices, the Producer Price Index – the cost of inputs at the factory gate, if you will – is due in at +4.8% from +5.8% y/y. Slowly improving inflation readings out of China could filter through and impact the Australian and New Zealand Dollars under the guise that greater demand and ‘hotter’ economic activity from China will help with the two antipodean currencies appreciate – sentiment that has clearly developed over the past four weeks given the sharp rebound in commodity prices and the ensuing pickup in AUD- and NZD-cross rates.

Pairs to Watch: AUD/JPY, AUD/USD, NZD/JPY, NZD/USD, USD/CNH

01/12 Friday | 13:30 GMT | USD Advance Retail Sales & Consumer Price Index (DEC)

Consumption is the most important part of the US economy, generating approximately 70% of the headline GDP figure. The best monthly insight we have into consumption trends in the US might arguably be the Advance Retail Sales report. In December, according to a Bloomberg News survey, consumption was due in at +0.4% from +0.8% m/m. The Retail Sales Control Group, the input used to calculate GDP, is due in at +0.4% from +0.8% m/m as well. Currently, the Atlanta Fed GDPNow Q4’17 growth forecast is +2.7%.

FX Markets Tracking Global Equities, US Dollar Awaits CPI & Retail Sales

According to a Bloomberg News survey, US consumer prices were marginally higher on a monthly-basis in October, due in at +0.1% from +0.4% m/m and +2.1% from +2.2% y/y. The core readings should be similar, at +0.2% from +0.1% m/m, and at +1.7% unch y/y. These figures suggest some underlying disinflation continues to persist, threatening to undermine the Fed’s planned path for three hikes in 2018; the first hike is being priced in for March 2018.

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

Read more: Euro’s Strong Fundamentals Drive Long Positioning Build Up at Start of 2018

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

To contact Christopher, email him at cvecchio@dailyfx.com.

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