Coronavirus fears likely to dominate
Developments surrounding the Chinese coronavirus will be very important during the week ahead. In particular, markets will be monitoring the domestic spread of the virus and international contagion risks will be key elements.
If Chinese containment efforts appear to be failing and international cases intensify, there will be further strong demand for defensive assets and a slide in equity markets. In this environment, the yen and Swiss franc would remain strong and potentially gain further.
If containment efforts appear to be making headway and the international spread is limited, there will be some relief in global markets.
The situation will be complicated by the lunar new-year holidays. Chinese markets are scheduled to be closed on Monday-Thursday. Assuming the closures are not extended, Friday’s trading is likely to be extremely volatile, although the authorities will inevitably intervene. The holiday period will also make it more difficult to assess domestic developments.
The Federal Reserve will announce its latest policy decision on Wednesday with very strong expectations that interest will remain on hold at 1.75%.
Chair Powell will hold a press conference, but there will be no updated economic projections or forecasts of interest rates from the individual committee members. The most likely outcome is a wait and see stance.
As far as data is concerned, the advance reading of fourth-quarter GDP is scheduled for release on Thursday. The overall impact is likely to be limited with the Fed committed strongly to unchanged interest rates in the short term.
President Trump’s impeachment trial will need to be monitored in case there is evidence of a shift within the Republican Party.
The Bank of England will announce its latest interest rate decision on Thursday, There will be a statement, vote split and minutes while the bank will also release the quarterly monetary policy report. This will be the last meeting for current Governor Carney.
Market expectations are divided with the potential for an interest rate cut seen at close to 50%. Sterling would be likely to rally initially if interest rates are held at 0.75%, although forward guidance will also be very important. Sterling will dip sharply if there is a rate cut, although buyers could return quickly. The main feature is likely to be volatile trading during the week.
The UK is also scheduled to leave the EU officially on January 31st, although the market impact should be limited with future trade negotiations the key element.
The German IFO business confidence index will be released on Monday with expectations of a significant monthly improvement. The latest German CPI inflation reading is due on Friday.
The data is unlikely to have a significant impact unless there is a notable increase in the inflation rate.
The Australian CPI inflation data is due for release on Wednesday local time and will be another important indicator for the Reserve Bank to consider ahead of the February policy meeting. Weak data would increase speculation over a rate cut.
The latest Chinese PMI business confidence data is due on Friday. There will not be any impact from the coronavirus outbreak within this data. The overall impact is likely to be limited given that it will be overshadowed by on-going coronavirus fears.
Currency FX Forecast for Next Week
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