Forex Weekly Outlook: Fed, BoE in spotlight

US Treasury yields have had a strong impact on the currency markets and remain in focus. The Fed and BoE hold policy meetings this week, and the eurozone and Canada release inflation reports.

The ECB announced that it would accelerate its purchase of Eurobonds under its emergency PEPP program, in response to rising yields. The ECB did not specify the amount or time frame of the new purchases. The euro’s response to this move was muted. Eurozone GDP for Q4 was revised downwards to -0.7%, down from -0.6%.

In the UK, the monthly GDP report showed that the economy contracted by 2.9% in January. This was considerably better than the street consensus of -4.9%, but indicated a downturn in growth after a gain of 1.2% in December. The economy is reporting negative growth for the second time in three months, raising concerns about the health of the economy.

The Bank of Canada upgraded to positive its forecast for GDP growth in Q1, noting that the economy was recovering more quickly than expected. The bank held interest rates at 0.25% and said it had no plans to raise rates until 2023.

Canada posted outstanding employment numbers on Friday, which sent the Canadian dollar higher. The economy created 259 thousand jobs in February, after two straight declines. The unemployment rate fell to 8.2%, down from 9.4%.

In the US, inflation ticked higher in February, much to the relief of the market, which has been concerned that pent-up demand could lead to runaway inflation. Core CPI edged up to 0.1%, up from 0.0%. Headline CPI ticked up to 0.4%, up from 0.3%. The week ended on a positive note, as UoM Consumer Sentiment for March rose from 76.2 to 83.0. Consumer confidence has risen to its highest level in 12 months.

1. French Final CPI: Tuesday, 7:45. Inflation in the eurozone’s number two economy is to confirm the initial estimate of -0.1%. Inflation in the eurozone’s number two economy is expected to confirm the initial estimate of -0.1%. This decline comes after three straight gains of 0.2%.
2. US Retail Sales: Tuesday, 12:30. Retail sales sparkled in January, as the headline and core release posted gains above 5 percent. February is expected to be muted, with the headline read coming in at -0.5% and the core release at 0.2%.
3. Eurozone Inflation Report: Wednesday, 10:00. There are growing concerns that eurozone inflation is rising, and this was alluded to by ECB President Lagarde in her decision to buy more Euro-bonds. The final readings for February are expected to confirm the initial estimates of 0.9% for headline CPI and 1.1% for Core CPI.
4. Canada Inflation Report: Wednesday, 12:30. Headline CPI rose 0.6% in January, its highest level in seven months. Another solid gain is projected for February, with an estimate of 0.7%.
5. Federal Reserve Rate Decision: Wednesday, 18:00. The Fed is expected to send a dovish message to the market. With the US recovery gaining traction, investors will be interested in the Fed’s economic projections and dot plot, which signals the Fed’s expectations of future interest rate changes.
6. BoE Rate Decision: Thursday, 12:00. The BoE is widely expected to maintain the Official Cash Rate at 0.10% and asset purchases at GBP 895 billion. With the UK going through its worst economic crisis in three centuries, investors will be looking for signals from the bank as to whether it plans to add stimulus in order to boost the economy.
7. Canadian ADP Nonfarm Employment Report: Thursday, 12:30.  The ADP report painted a grim portrait of the labor market in January, with a reading of -231.2 thousand. We now await the February data.