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U.S. CPI print, FOMC, ECB

By OFX

The PM hosted Japanese Prime Minister, Shinzo Abe at Downing St as the two discussed a post-Brexit relationship between the two countries. Abe was the latest high profile name to warn against the UK leaving the EU without an agreement saying the “whole world” wanted the UK to avoid a no deal scenario. Political commentators expect May’s plan to get voted down by a huge margin on Tuesday however it is what happens after that which will be concern to fx traders. Many expect Labour leader Jeremy Corbyn to try and initiate a general election which would likely delay us leaving the EU.

Due to the lack of clarity when Federal Reserve Chairman Jerome Powell said that the central bank would continue to unwind its balance sheet. While Powell reiterated the views of other policymakers that the Fed would be patient about interest rate hikes, he said the bank's balance sheet would be "substantially smaller" and raised concerns about the size of U.S. debt.

Also the US-China trade talks appear to be heading towards a constructive, risk-positive result. For instance, the USD/CNH (US dollar – Chinese Yuan) is at its lowest level (strong Yuan) since August as China has pursued additional monetary and fiscal stimulus. China proxy trades (like EUR/USD) continue going higher (strong Euro), and this is also negatively affecting the US dollar.

The European Central Bank stated that risks for the Eurozone are tilted to the downside in Thursday’s publication of the minutes of its latest policy meeting with concerns growing over the state of the global economy. German and French data of late has missed target with the EZ’s largest economy, Germany looking like it could possibly slip into recession when fourth quarter data is released early next month. On the back the deteriorating outlook money markets have pushed back estimates of when the ECB will hike rates to 2020 from late 2019.

A marginal narrowing of the trade surplus in December did little to sway AUD valuations intraday and broader focus remains affixed to US/China trade talks. Optimism surrounding the latest discussions has improved as key US officials suggest an agreement on trade that both sides “could live with” may be reached.

All eyes were on the release of the FOMC as it released a much more dovish rhetoric acknowledging the path of interest rate rises is less clear now. Comments were in line with FOMC chairman Jerome Powell’s speech in Atlanta the previous week that the Fed were closer to neutral than the market was expecting.

The BoC mentioned that the rate normalization would happen “over time,” and also that the Canadian economy has been performing well overall, growth has been running close to potential, and unemployment is at a 40-year low. The BoC also pointed out that looking ahead, exports and non-energy investment are projected to grow solidly, supported by foreign demand, the CUSMA, the lower Canadian dollar, and federal tax measures targeted at investment.

However, the BoC did allege risks from oil and housing. They stated that housing investment has been weaker than expected, as housing markets adjust to municipal and provincial measures, changes to mortgage guidelines, and higher interest rates. Furthermore, household spending will be dampened further by the slow growth in the oil-producing provinces. Regarding the oil concern, it seemed misplaced with oil WTI now in a bull market. The next interest rate decisions are on March 6th and April 24th.

The value of the New Zealand dollar went slightly weaker against the Greenback despite news that US-China trade negotiations were progressing well.

The big news was the Federal Reserves’ Chairman Powell speech at the Economic Club of Washington DC which received a mixed response. The news was decidedly more hawkish than the meetings minutes on Wednesday with Powell reiterating the Fed’s data driven stance and confidence in the economy. The positive read did lead to a resurgence in the USD in some geographies but mostly failed to sway markets overall.