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US Jobs, Inflation Data May Trigger Another Market Selloff

US Jobs, Inflation Data May Trigger Another Market Selloff

2016-02-01 07:15:00
Ilya Spivak, Sr. Currency Strategist
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Talking Points:

  • Upbeat US data may reboot Fed rate hike bets, ignite risk aversion
  • Pound may rise if BOE rhetoric clashes with markets' dovish views
  • RBA interest rate decision likely to maintain status quo, pass quietly

Speculation about the direction of Federal Reserve monetary policy remains a defining theme for financial markets. This week brings the release of critical mandate-centric fundamental data points: the PCE inflation gauge and the monthly Employment report.

An aggressively dovish shift in priced-in rate hike bets in recent weeks suggests volatility risk asymmetrically skewed to deliver a stronger response if news-flow is supportive of tightening versus the alternative. Better-than-expected outcomes stand to benefit the US Dollar and may trigger risk aversion, sinking the sentiment-linked Australian and New Zealand Dollars while offering support to the Euro and Yen.

Similarly, the British Pound has suffered against a backdrop of fading BOE rate hike bets over recent months. With that in mind, Sterling is likely to be more responsive If this week's policy announcement fails to match the dovish shift in market views and continues to hint at tightening this year. Alternatively, a change in tone to match investors' dour outlook may pass with relatively fewer fireworks.

The RBA will probably stick with a familiar tone in its policy announcement. An improvement in home-grown economic news-flow is likely to be counter-balanced by mounting external risks - notably from China - in the eyes of policy-makers. This means Governor Glenn Stevens and company will likely maintain a neutral, data-dependent posture. Such a result will offer little by way of direction cues to the Aussie, leaving the currency at the mercy of sentiment trends.

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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