Will currencies continue to diverge from fundamentals the week ahead?

Monetary policy guidance and strong U.S. data failed to provide another push higher for the greenback last week. Fed Chair Janet Yellen made a blunt statement in her testimony before Congress that it would be unwise to wait too long to tighten monetary policy. Several of her colleagues followed by similar rhetoric specially Boston Fed President, Eric Rosengren, who even suggested that the fed may raise rates by more than three times in 2017.

On the data front consumer prices increased to highest levels in nearly four years and retail sales came in well ahead of expectations. Overall, most of the economic data releases were positive, and still, the U.S. dollar did not perform well.

The fall in U.S. treasury yields on Thursday which eventually narrowed the spreads between U.S. bond yields and their counterparts may explain partially why the U.S. dollar couldn’t resume its two-week uptrend. But dollar bulls seemed reluctant to push the currency higher without President Trump providing a clear agenda on tax and trade policy, and may not get one until he addresses the joint session of Congress on February 28.

The FOMC minutes due to release on Wednesday may reverberate recent hawkish remarks made by Fed officials, but without providing a solid indication on the path of interest rates, the impact on the dollar will likely be minor. Another aspect of interest will be a discussion of scaling down the central bank’s balance sheet, any sort of such discussion will likely support the dollar. Apart from FOMC minutes and Fed officials scheduled speeches there’s no tier one data on the shortened trading week.

The cable also challenged fundamentals last week. A terrible retail sales report, below than expected inflation, and drop in wage growth all failed to break the 200 pips trading range for GBPUSD. Traders will have the chance to hear from Mark Caney on Tuesday when he testifies before the UK parliament’s Treasury Committee. What’s going to be interesting is that his testimony comes after Bank of England upgraded its growth forecast in February 2, and since then signs of weakness in the economy emerged. Markets are currently seeing less probability of BoE tightening this year, but if Carney indicates that higher interest rates are still on the table during UK’s negotiation period, sterling may find some support.

EUR traders will be braced for some volatility on Monday when Euro area finance ministers gather to discuss Greece bailout, and “Grexit” term will probably show again if talks between Athens and its creditors get more complicated. Greece has about €7.5 EUR of debt due by July, and it’s unlikely to manage to pay back without securing another tranche of the bailout. This comes at a time where the Eurozone faces several elections with anti-euro politicians on the rise. On the data front, PMI’s reports, consumer confidence, and inflation data are scheduled for release.