Forex Weekly Outlook: US dollar retreats, inflation on the move

The US dollar rally earlier this year has taken a pause, as other major currencies have made inroads against the US currency. Economic growth remains muted in the developed economies, although inflationary pressures have been increasing in Europe and in the US. This week’s highlights include US GDP and Eurozone inflation reports.

Eurozone GDP came in at -0.6% in Q4 of 2020, pointing to stagnation in growth. German ZEW Economic Sentiment accelerated for a third straight month, rising from 61.8 to 71.2. German and Eurozone Manufacturing PMIs rose in January, with readings of 60.6 and 57.7, respectively. These numbers point to strong expansion. Services remain in contraction, as the PMIs came in at 45.9 and 44.7, respectively.

In the UK, inflation has been moving higher. Headline CPI in January rose to 0.7%, up from 0.6%. This marked a 3-month high. Core CPI remained steady at 1.4%

Across the pond, Canada, headline CPI rose 0.6% in January, up from -0.2% beforehand. Core CPI gained 0.5%, its best showing since February 2020.

In the US, January retail sales pointed to a strong rebound in consumer spending. The headline read jumped 5.3% while core retail sales came in at 5.9%. The forecast for both releases stood at 1.1%. The FOMC minutes reiterated a dovish message from the Fed, which signaled that it has no plans to taper QE anytime soon. Services and manufacturing remain well into expansionary territory, as the January PMIs came in at 58.5 and 58.9, respectively.

1. UK Employment Report: Tuesday, 7:00. Jobless claims dropped to 7.0 thousand in December, down from 64.3 thousand beforehand. We now await the January data. Wage growth is expected to accelerate for a sixth successive month, with a forecast of 4.1%, up from 3.6%. The unemployment rate has been creeping higher and is expected to edge up to 5.1%, up from 5.0%.
2. Eurozone Inflation Report: Tuesday, 10:00. Inflationary pressures have been rising and Eurozone headline CPI for January is expected to show a strong gain of 0.9%, after five straight declines. The core reading is projected to jump from 0.2% to 1.4%.
3. German GDP: Wednesday, 7:00. The eurozone’s largest economy rebounded in Q3, with a gain of 8.5%, after a decline of 9.7% beforehand. However, the estimate for Q4 is a negligible 0.1% gain.
4. Fed Chair Powell Testifies: Tuesday, 15:00. Powell will appear before House and Senate committees to discuss the economy and monetary policy. The markets are expecting Powell to reiterate the Fed’s dovish stance. An optimistic view of the economy could push the dollar upwards.
5. US GDP: Thursday, 13:30. First-estimate GDP for Q4 of 2020 came in at 4.0%, and the second estimate is expected to be revised upwards to 4.1%.