Forex Weekly Outlook – The BOJ will likely keep its powder dry for some time

While Mid-East tensions calmed down, trade and the US consumer rocked the dollar. What’s next? Rate decisions in the eurozone, Japan and Canada stand out. Here the highlights for the upcoming week.

The British pound was under pressure after UK GDP figures showed a contraction in November and Bank of England officials hinted at an upcoming rate hike.

1. Japan rate decision: Tuesday morning. The Bank of Japan has left its negative interest rate of 0.1% unchanged for several years and it also maintains its vast bond-buying scheme. Its most notable change of late has been pledging to keep low rates for as long as necessary. Will it take bolder steps amid stagnating inflation? The chances are slim. Given the recent weakness of the yen, the BOJ will likely keep its powder dry for some time.
2. UK jobs report Tuesday, 9:30. As tension is mounting toward the upcoming BOE decision on January 30, labor market figures for November may provide more insights. The unemployment rate stood at 3.8% in October, around the historic lows. However, wage growth extended its deceleration and hit 3.2% after peaking at 3.9% in July. Without an increase in salaries, inflation – the BOE´s mandate – is unlikely to rise.
3. German ZEW Economic Sentiment: Tuesday, 10.00 After long months in negative territory, ZEW’s 300-strong survey turned positive in December with a score of 10.7 – the fourth consecutive upside surprise. A similar score is likely in the early survey for January. Changes in business confidence are eyed by the ECB.
4. Canada rate decision: Wednesday, 15:00. The Bank of Canada has left its interest rates unchanged throughout 2019 and it is unlikely to stray away from this trend in the first decision of 2020. While the labor market is off the peak of early last year, the recent jobs report was encouraging. Inflation – figures for December are due out shortly before the decision – has also been healthy. Overall, Governor Stephen Poloz, who is stepping down in June, will likely leave rates unchanged and signal satisfaction with the Canadian economy.
5. Australian jobs report: Thursday, 00:30. Australia’s labor market rebounded in November after a fall in October, adding 39.9K jobs. The jobless rate also improved with a drop from 5.3% to 5.2%, but it remains above the Reserve Bank of Australia’s 5% target. Overall, a satisfactory report may help the Aussie hold its ground and push back the next rate cut by the RBA.
6. Eurozone rate decision: Thursday, the decision is due at 12:45, and President Christine Lagarde will meet the press at 13:30. At her inaugural meeting, Lagarde promised to learn and announced that the bank will conduct a strategic review. After her predecessor Mario Draghi restarted the QE program and cut rates, the new president has time to learn the new jobs. The ECB is unlikely to change its policy at this juncture, but Lagarde’s comments on recent development are set to shake the euro. Is economic growth picking up? Or were recent figures only “green shoots” without any follow-through. The bank does not publish new staff forecasts at this juncture, so Lagarde’s general tone on the economy will set the new direction for EUR/USD.
7. Eurozone flash PMIs: Friday, 8:15 in France, 8:30 in Germany, and 9:00 for the whole eurozone. Markit’s forward-looking guidance figures for December mostly showed growth – apart from in German manufacturing, the most important sector. That Purchasing Managers’ Index dropped to 43.7 points, well below the 50-point threshold separating expansion from contraction. Investors will want to see if manufacturing is dragging the economies down or if consumers can continue driving it forward. Apart from the German Manufacturing PMI, the composite figure for the whole eurozone is of interest.
8. UK flash PMIs: Friday, 9:30. Similar to the continent, Britain’s manufacturing is suffering from a slump. However, the revised services sector figure for December hit 50 points, a perfect balance between expansion and contraction. Is the UK’s largest sector recovering? Or will it slip back down? Given the recent negative GDP read, a disappointment cannot be ruled out.

*All times are GMT