High volatility will continue
Currency market volatility is likely to remain very high in the short term with very sharp moves across all major pairs, especially given the huge moves in interest rate futures, equity markets and oil markets. The very high-risk trading environment and danger of very sharp moves should not be under-estimated. There may be opportunities to look for reversal within the next few weeks, but fear is liable to dominate in the short term.
Coronavirus developments will continue to dominate
Global coronavirus developments will continue to be extremely important in the week ahead and will over-shadow all other factors. The spread of the break outside China will be a key element, especially in the US and Italy during the week.
Speculation over further US interest rate cut
The Federal Reserve should not be making comments on monetary policy during the week with a blackout in operation ahead of the March 18th meeting.
The central bank will, however, be watching the situation very closely and will find ways of communicating with markets if it needs to take further action.
Wider central bank rhetoric important
Markets will also be monitoring rhetoric from global central banks, including China. Increased fears over the global outlook and declines in equity markets would create pressure for further cuts in interest rates by all major central banks.
Government actions also vital
The actions of governments to alleviate stresses in domestic economies will also have an important impact on market sentiment.
Markets will tend to reward pro-active action to support demand.
The latest CPI inflation data will be released on Wednesday, but the overall impact is likely to be limited as the Federal Reserve will be focussed on potential economic weakness. Weak data would reinforce expectations of very low-interest rates.
A further six states will hold their Democrat Party primary elections. Congressional actions to support the economy will also be watched closely during the week. President Trump’s rhetoric will also be watched very closely.
The GDP and industrial production data releases are unlikely to have significant impact as they will be historic.
The budget will be an important focus on Wednesday 11th, especially in view of the coronavirus impact.
There had been expectations that there would be a significant spending boost to support the economy. The focus now will now tend to be on measures to support the economy through the coronavirus outbreak, although infrastructure spending will still be significant for sentiment.
There will also be speculation that the Bank of England will move to cut interest rates to coincide with the budget announcement to trigger a larger boost to confidence.
The ECB will hold its latest policy meeting on Thursday. Comments from bank officials suggest it is unwilling to cut interest rates, but markets are expecting at least a limited response from the committee. If rate cuts are rejected, there is scope for additional support measures such as cheap loans. Rhetoric from bank President Lagarde in the press conference will be watched closely.
The oil market will remain an important factor during the week. Over the weekend, Saudi Arabia announced that it would boost production to increase market share and cut prices. Oil prices are set to decline very sharply on Monday, potentially to 4-year lows and there will be further short-term weakness in the Canadian dollar.
Currency FX Forecast for Next Week
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