Great Week for Dollar, Euro Recovery Ahead?

The US dollar wraps up another good week with gains against most of the major currencies. The only exceptions were the Swiss Franc which climbed to its strongest level in 3 months and the Canadian dollar, which held onto its recent gains. Investors brushed off softer US inflation data in favor of stronger retail sales, manufacturing activity and pickup in housing starts.  However stabilization in US yields and the record breaking moves in US stocks are the primary reasons why investors are piling into US dollars. In the week ahead, there's very little to deter the greenback's positive outlook as there are no major market moving economic reports on the calendar and US markets are closed for Martin Luther King Jr. Day on Monday. If there are any unexpected political or geopolitical headlines, USD/JPY will be negatively affected but the greenback should extend its gains against other currencies.

UK and Chinese data were the bigger stories. Consumer spending in the UK contracted for the second month in a row in what is normally the most critical shopping month. Even Prime Minister Johnson's smooth election victory failed to bolster demand. Between the softer industrial production, trade, inflation and now retail sales numbers, the odds for a first quarter rate cut from the Bank of England is extremely high. At minimum when they meet again, more than 2 members of the monetary policy committee could vote in favor of easing. Interestingly, sterling is just beginning to lose momentum. With further losses expected in the week ahead, UK labor and PMI reports could exacerbate the slide. GBP/USD ends the week near 1.30 but could slip below 1.29 if data is weak.

China on the other hand reported stronger trade, industrial production and retail sales numbers this week. Unfortunately AUD and NZD failed to benefit from these reports as investors worry about domestic pressures. For Australia, its only a matter of time before data reflects the negative damage caused by the wildfires and for New Zealand, manufacturing activity contracted in December. So while China's economy may have stabilized at the end of the year, New Zealand's is losing momentum. AUD and NZD are in focus next week with Australian labor market and New Zealand inflation numbers scheduled for release.

However the main currencies to watch are euro and loonie because the European Central Bank and Bank of Canada will hold monetary policy meetings. The ECB is currently undergoing policy review and could change their inflation goal for the first time in 17 years. This change and its explanation could have a dramatic impact on the euro. January PMIs which give us a first look at how the Eurozone economy is doing at the start of the year is also a marketing moving event for euro. Meanwhile no changes are expected from the Bank of Canada but given the unevenness of recent data, investors will be eager to see if the chance of easing increased. While euro lost value this week, data continues to improve giving us confidence that the pair could head back up to 1.12 in the next few weeks. USD/CAD on the other hand consolidated in a tight range and is prime for a breakout.