Fed will point a right direction on Jan, 29 | 31 January 2014

Review of the past week

According to the results of the previous week, US currency got weaker against its major competitors. Over the first half of the week, euro had been pressured by weak ZEW economic sentiment index. Bears tried to force in 35th figure, but did not succeed in their efforts. Following to release of positive PMI in German and France on Thursday, there was an abrupt upsurge of EUR/USD pair up to the level of 1.3697. Nevertheless, reaction of investors to PMI release was too frantic and on the last trading day a slight growth of euro was followed by profit taking on long positions in the second half of the day. Trading week was closed at the point of 1.3677.

Next to EUR/USD pair, British currency consolidated it positions against its US rival. For GBP/USD pair, Wednesday was the most striking day of the week. In particular, recordings of the last BoE meeting as well as the labor market report were published on this day. Unemployment dropped down to 7.1% in November, which says about recovery of the UK labor market. On this positive background, quotations of GBP/USD sharply went up overcoming a few resistances in success on the fly. Growth continued on Thursday and a fresh high was established for the last 2 years. But British regulator put a spoon of tar in a barrel of honey by saying that there is no need to rise interest rates once unemployment reached a target level as of 7%. On Friday 24, while speaking at the international Davos economic forum, BoE Governor Mark Carney confirmed intentions of the British monetary authorities to keep interest rates low over a long period of time. Along with sales on the global stock exchanges, it led to a considerable drop of GBP/USD quotations and trade week closed at the point of 1.6482.

For USD/JPY, core event of the week was meeting of the Japanese Central Bank, which took place on Wednesday, January 22. Investors were expecting comments regarding possible enhance of stimulative program. In April consumption tax will be increased that will affect profit of corporations and will put a pressure on the economic growth in the second quarter of present year. But no changes in monetary policy were announced which was a come-down for traders. It was also stated at the press-conference that growth of salaries will be positive for inflation and by the end of 2014, inflation on the level of 2% can be expected. Increase of sales tax will impact economic growth, but now management of the Japanese CB does not predict any negative affect. Such actions of regulator played into the hands of bears which being put along with drop of Nikkei 225 futures had sent USD/JPY pair to 102 figure.

Forecast for the week January 27 – 31:

Euro/US dollar:

FRS meeting will be the core event of the week. Its results will be announced on Wednesday, 22nd of January. It will be the last meeting chaired by Ben Bernanke as FRS chief, the next meeting in March will be chaired by Janet Yellen. Though December report on labor market was weak, experts interviewed by WSJ news agency expect that tapering of QE-3 by 10 bln. USD will continue. In mid-January, FOMC' representatives Fisher and Plosser spoke in favor of tapering. If on Wednesday it will be announced about tapering back bonds purchases, US currency will be in demand and in short run EUR/USD will be weakened.

On Thursday, 30th, USA will publish GDP data for the 4rd quarter of 2013. Anticipating indicators tell about release on the medium level of forecasts which will be positive for USD as well. 3.2% index is rather high nowadays and says about a sustainable level of US economy recovery.

On the last trading day of the week, traders will obtain advance data on European CPI in January. If we take into account seasonality, we can say that in the most part of cases, inflation go down in the first month of the year. Consumer confidence indicators show a slight growth in Europe, but it is not enough for a serious increment of inflation. We can expect data to be released for 0.1% worse than consensus-forecast tells. It will put a certain pressure on united European currency. In general, a moderately descending tendency can be expected during a week.

Pound/US dollar:

On Tuesday, 28, GDP data for the 4rd quarter of 2013 will be published in Great Britain. Over the last quarter of the previous year, labor market and retails demonstrated a good growth which allows to expect positive GDP report. We can expect release just above consensus-forecast level which will support demand in British currency. FRS meeting on Jan 29 and US GDP release are able to render a short-term support to USD. In general, GBP/USD are still rather strong and we can expect a flat tendency over the week.

US Dollar/Yen:

A lot of macroeconomic reports will be published in Japan. Thursday's report on Jan 30 and inflation index released on Friday, 31 must be primarily focused. Volume of retail in all-day shops dropped in December, which being put along with weak data on consumer confidence point that inflation process in Japan slow down. Both reports can be expected to be released on the medium level of forecasts that will not lead to serious changes in US Dollar/Yen alignment. US stats can support bulls. Tapering of stimulative measures in USA as well as its positive GDP report can support demand in USD/JPY pair. In general, a moderately ascending tendency can be expected over the week.