The Forex Week Ahead

The Forex Week Ahead: March 20th – 24th

USD The Federal Reserve delivered on an expected interest rate increase this week, only its third hike in U.S. borrowing costs in a decade. In the bank’s accompanying statement, the Fed continued to sound a generally optimistic tone on the outlook for the economy but in somewhat of a surprise to dollar bulls, did not meaningfully signal a faster pace of interest rate increases this year. The US Dollar fell to a five-week trade-weighted low and bond yields tumbled while equities, commodities and higher risk assets soared in the wake of the Fed’s less hawkish than expected guidance on interest rates. The fact that the Fed stuck to its previous forecasts for a total of three interest rate hikes this year provided investors with an opportunity to unwind long-U.S. dollar positions. A relatively quiet week on the U.S. data front will be headlined by durable goods orders late in the week. A number of Fed monetary policymaker speeches, including one from Fed Chair Yellen on Friday, will be closely analyzed for clarification on the bank’s outlook for lending rates over the coming months.

EUR The euro rose to a five-week high, benefiting from a broadly weaker U.S. currency following the market’s disappointment in the Fed statement, a welcomed result in the Dutch national elections and comments from an ECB policymaker describing various ways that the bank could begin to raise interest rates. The euro zone calendar will be headlined by the flash PMI’s for the 19-member bloc’s economy. Another round of solid PMI reports would likely amplify calls within the ECB for more robust discussions on raising lending rates- a scenario likely to support the euro.

GBP Sterling strung together three-straight sessions of gains against the dollar for the first time since mid-January this week, thanks to the disappointing Fed statement on Wednesday and news on Thursday that one BOE policymaker surprisingly voted to raise U.K. borrowing costs. U.K. calendar will bring key gauges of consumer inflation and retail sales this week. Following the one BOE policymaker’s surprise vote to raise interest rates at last week’s MPC meeting, any upside surprise to CPI would likely fan speculation that rising inflation could force the BOE to raise lending rates sooner rather than later.

JPY A very quiet week in Japan will likely keep the yen’s direction driven by broader moves in global financial markets and in particular, in U.S. bond markets. Any uptick in U.S. yields should help the dollar recover some of its post-Fed losses against the yen.

CAD The Canadian dollar jumped to a two-week high against the greenback and enjoyed its best single-day performance in a year after the Fed’s less hawkish than expected guidance on Wednesday and following the first decline in U.S. crude oil inventories since the start of the year. A busy week on the Canadian data front will bring closely watched gauges of retail sales and CPI to bookend the week. While various indicators like Canadian employment have surprised to the upside, both retail sales and core inflation have undershot expectations and have kept the BOC cautious.