Talking Points:

- The FOMC meeting on Wednesday is Janet Yellen’s last as Fed Chair, as Jerome Powell will be taking over the leadership; don’t expect a change in policy much more beyond the statement’s tone.

- The best chance at derailing the EUR/USD rally would be if both Q4’17 GDP and January CPI missed expectations, while the FOMC signaled a more hawkish policy path forward.

- Retail trader positioning suggests if the US Dollar wanted to bottom, now might be a good time to finally do it.

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.

01/30 Tuesday | 10:00 GMT | EUR Gross Domestic Product (4Q A)

The first look at the Q4’17 Euro-Zone GDP report is expected to show the world’s largest common market grew by +2.7% on an annualized basis, up from +2.6% in the third quarter. This would be the fastest rate of growth since Q1’11, when the Euro-Zone economy grew by +2.9%. Growth is accelerating in the Euro-Zone, and another solid GDP reading will do little to stop speculation over the European Central Bank’s timeline to taper their QE program. A significant miss here would bring greater downside than a beat would have on the upside, given how stretched positioning is (per the CFTC’s COT report, speculators are the most net-long the Euro ever, at 144.7K contracts).

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

01/31 Wednesday | 01:30 GMT | AUD Consumer Prices Index (4Q)

Consumer price inflation is expected to have returned back into the Reserve Bank of Australia’s medium-term target range (+2-3%) during thefourth quarter of 2017, up to +2% from +1.8%, according to market estimates. The RBA’s target is defined as a medium-term average to allow for any unseen circumstances and for lags in the effects of monetary policy. Inflation is expected to be pushed higher by rising commodity prices boosting domestic income and expenditure. With inflation levels still low – Q4’16 figures (just a year ago ago) were the lowest in 19-years – interest rate hikes are still a way off, with the first hike due in by August 2018 (61.8% per overnight index swaps).

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

01/31 Wednesday | 10:00 GMT | EUR Euro-Zone Consumer Price Index (JAN A)

Inflation remains low in the Euro-Zone, but that doesn’t appear to be getting in the way of the market pricing in the end of the ECB’s QE program. For the upcoming preliminary January CPI report, neither the core nor the headline figure near the European Central Bank’s +2% medium-term target (+1.0% and +1.3% (y/y), respectively). At the January 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. That being said, President Draghi’s preferred market measure of inflation – the 5-year, 5-year inflation swap forwards – are up near their highest level in 12-months thanks to the ongoing rally in energy prices. Like the GDP report due out earlier in the week, the risk to the Euro is asymmetric here.

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

01/31 Wednesday | 19:00 GMT | USD Federal Reserve Rate Decision

The Federal Reserve’s January policy meeting won’t bring about a significant change in policy, given that it is a meeting without a press conference or a new Summary of Economic Projections (SEP) meeting. Accordingly, the policy statement will need to contain a marked shift in tone in order to move markets. That being said, since it is Janet Yellen’s last meeting as Fed Chair before Jerome Powell takes over next month (and chairs his first meeting in March), it seems highly unlikely that the market will read too deeply into whatever determinations this composition of FOMC voters make. For what it’s worth, the changes to the FOMC’s voters means the composition should be getting more hawkish at future meetings, meaning the expectation for three hikes this year should stay intact.

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

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

The main issue for the US Dollar when it comes to the January 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, and markets have swung in agreement with this assessment (hikes due in March, June, and December per Fed funds futures). 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 +180K.

FX Markets Look to EZ GDP, Aussie & EZ Inflation, FOMC & US NFP

According to the Atlanta Fed Jobs Growth Calculator, the economy only needs +106K jobs growth per month over the next 12-months in order to sustain said unemployment rate at its current 4.1% level.

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

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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