Talking Points:

- The US Dollar begins the week lower as the US federal government shutdown enters day three, but it may be a non-issue soon as the Senate is set to vote to reopen the government immediately.

- In terms of central banks, the Bank of Japan and the European Central Bank are due to meet this week but neither is expected to change policy in a meaningful way.

- Retail trader positioning still points to weakness for the US Dollar and strength for US stocks in the coming week.

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.

01/23 Tuesday | --:-- GMT | JPY Bank of Japan Rate Decision

The monthly Bank of Japan Monetary Policy Statement is expected to see rates remain at -0.10% with the 10-year JGB yield target unchanged around 0%. Consumer price inflation in Japan rose by +0.9% in November 2017, and is expected to tick up to +1.1% in December 2017 (due later in the week) – both of which remain below the BOJ’s +2% target. Despite the fact that the BOJ has begun what some may consider to be a “stealth taper,” it doesn’t appear that the BOJ will be ready to make any more changes to its policy in the near-term. Even as it begins to see a future in which it can end its QE program, expect the BOJ to retain the mantle of ‘most dovish G7 central bank’ for the foreseeable future.

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

01/24 Wednesday | 21:45 GMT | NZD Consumer Price Index (4Q)

New Zealand is expected to see Q4’17 inflation figures hold steady relative to the prior quarter, with changes in energy prices and the New Zealand Dollar trade-weighted exchange rate essentially coming in as a wash. As a result, we’re looking for the Q4’17 New Zealand CPI figure to come in at +1.9% (y/y), which would be the third consecutive quarter with sub-2% inflation. Another reading below the RBNZ’s medium-term target should keep rate hike speculation for the first half of 2018 tempered.

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

01/25 Thursday | 12:45 GMT | EUR European Central Bank Rate Decision & Press Conference

The ECB’s expected exchange rate for 2018 for EUR/USD comes in at 1.1700, meaning Friday’s close at 1.2214 was closing in on a +5% move (1.2285) above the year-end target, a threshold the ECB has previously bristled at once broached. But considering that the coming policy meeting is one without a new set of Staff Economic Projections (SEP) – those are due next in March – there’s unlikely to be a formal shift in ECB policy on Thursday.

Instead, ECB President Mario Draghi will likely caution market participants about how further Euro strength could get in the way of achieving the medium-term inflation target. The evidence he can point to is fresh in recent memory, with the final December Euro-Zone CPI report showing headline inflation at +1.4% y/y; it isn’t a stretch to suggest another sharp move higher in the Euro trade-weighted exchange rate could prove disinflationary. We expect the Euro to face a minor setback as a result of the ECB rate decision this week, but not significantly and for not that long.

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

01/26 Friday | 09:30 GMT | GBP Gross Domestic Product (4Q A)

The first look at Q4’17 UK GDP is expected to show the UK economy grew +1.4%, down from a prior rate of +1.7% (annualized). The quarter-on-quarter figure however is expected to a steady reading at +0.4%. The latest retail sales figures, released last week and included in Q4’17 GDP data, disappointed at +1.3% versus +2.6% expected (y/y), which bodes poorly for GDP. A combination of stagnating wage growth and rising inflation had crimped consumer expenditure, until recently the prime growth driver in post-Brexit UK.

The preliminary UK GDP reading is published around 25 days after the end of the quarter and is based on 44% of actual data. The second estimate is released around seven and a half weeks after the end of the quarter and is based on around 80% of actual data. The third estimate is released 90 days after the quarter’s end and is based on around 91% of actual data.

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

01/26 Friday | 13:30 GMT | USD Gross Domestic Product (4Q A)

Annualized US GDP in Q4’17 is expected to come in at an initial growth rate of +3.0% from +3.2% in Q3’17, according to a Bloomberg News survey. Overall, there still seems to be a sharp divide between ‘soft’ and ‘hard’ economic data, with confidence readings surging without a commensurate gain in actual economic activity. The Atlanta Fed GDPNow forecast sees last quarter’s growth at +3.4%, a bit more rich than most surveys. Evidence of a rebound in growth should confirm confidence in the Fed’s projected tightening path, which is currently pointing to a rate hike in March 2018.

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

Read more: The Big Question This Week: Is the Euro Too Strong?

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

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

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