Middle East tensions in focus
After the US military strike on a key Iranian military commander last week, Middle East developments will be monitored very closely.
Aggressive rhetoric from the US and Iran and retaliatory actions would maintain solid underlying demand for the Japanese yen on defensive grounds with the Swiss franc also strong. The yen would also be likely to spike stronger on any retaliatory attacks while any calming of rhetoric would weaken support slightly. Tensions overall would tend to provide limited net US dollar support.
The Australian and New Zealand dollars will tend to underperform if tensions remain elevated.
Trade developments still significant
Trade rhetoric will continue to be watched closely with the US-China trade deal due to be signed on January 15th. As long as the signing remains on track, confidence in the 2020 global growth outlook should continue to improve slightly.
The ISM non-manufacturing business confidence will be watched closely on Tuesday, especially as the manufacturing data last week was weaker than expected.
Employment-related data will be the main focus with the ADP data on Wednesday and monthly jobs report on Friday. Last month’s data was stronger than expected and a robust release would reinforce expectations that the Federal Reserve would be unlikely to cut interest rates further in the short term. A much weaker than expected release would trigger fresh doubts over the US outlook and there is the risk of an erratic figure given notable seasonal adjustments for this month’s data.
The overall impact should be measured, however, as the Federal Reserve will not over-react to one data release. A robust set of data would certainly limit the scope for any underlying dollar selling.
The UK services-sector PMI business confidence data is due for release on Monday with expectations of contraction for the month after a run of poor data.
Political developments will be monitored with the Brexit Bill due to be debated in parliament. Prime Minister Johnson is also due to meet with new EU Commission President von der Leyen. The rhetoric surrounding the possibility of any extension to the implementation period will be important for market sentiment towards the UK outlook.
Evidence of a more conciliatory stance would tend to support Sterling.
The latest ECB policy minutes are due for release on Thursday. Euro-zone consumer inflation data is scheduled for Tuesday, but releases are unlikely to have a major market impact with global trends dominating.
Canadian jobs data is also due for release on Friday and will be watched very closely following a much weaker than expected release last month.
Bank of Canada Governor Poloz is due to speak on Thursday. The combination of data and central bank comments will be important for the Canadian dollar with notable losses likely if employment declines again for the month. Developments in oil prices will also be important for the Canadian currency.
Currency FX Forecast for Next Week
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