Market Under Continued Pressure

The week on the economic calendar features some key GDP and inflation releases and ECB’s policy update. But market guidance will be likely dominated by news around Ukraine as economic implications take their toll. Notable events for the week could have a short-term impact on particular assets but are unlikely to offer much of a helping hand as growth forecasts keep being revised downward and inflation upward.

ECB closer to policy error

The EU will release Q4 GDP on Tuesday first before announcing a no policy change to interest rates on Thursday. Growth estimates show that economists expect Q4 growth to be revised from 2.2% to 0.3% as Europe remains widely exposed to Russia. Year on year, the GDP growth rate is expected to be revised from 3.9% to 4.6%, while it remains overly optimistic. A miss will be detrimental for the euro.

Intense geopolitical affairs have already shifted rhetoric from the last ECB meeting. With sanctions against Russia expected to boost inflation due to supply shortages, policymakers will be reluctant to maintain their hawkish narrative. With the outlook in full rotation, Lagarde will likely announce the end of PEPP and underscore that ECB’s approach to normalization will depend on the conflict. This could be bullish in the short term, but there are not many components at play to generalize the impact.

Apart from the GDP figures, Germany will report its own CPI inflation on Friday. Both the year-on-year and month-on-month numbers are expected to rise from 4.9% to 5.1% and 0.4% to 0.9% – respectively. If the uptick is bigger, the euro might see that transpire into prices.

EUR/USD is not at its best levels. The European currency fell to a near 2-year low last week and continues to decelerate against the dollar. After 1.08, 1.07 makes a strong level of support. On the flip side, and although unlikely to rebound up until there, 1.1050 is the observed resistance level.

US CPI critical for Fed next week

On Thursday, the US will release its widely anticipated inflation figures. US’s CPI is expected to soar from 7.5% to 7.9%. Although the crisis on Europe’s doorstep is not impacting economic indicators in the US that much, inflation from oil and natural gas prices will probably add to the upside as we advance.

For the month of February, a print above the forecasts will bring the rhetoric of a 50-basis point hike back on the table as Fed Chair has already warranted 25-basis points. If CPI exceeds economists’ estimates anywhere above 0.2%, even on a monthly basis, the dollar could see further upside up until the FOMC meeting next week.

USD/JPY has halted its ascend at 115 and seems to be turning flat ahead of the CPI release. At this stage, 115.5 and 114.37 are the range top and bottom. However, if markets receive a surprise in the CPI figures, the pair could move towards 116 and 113.90 – respectively.

UK’s monthly GDP in the spotlight

UK’s January GDP is due on Friday. The 3-month average figures are expected to remain unchanged at 1%, which is the case due to the UK’s action plan against Covid. While a number below the estimate will be seen as somewhat bearish, the UK delivers industrial production and construction output at the same time on Friday, making the expected impact on the pound hard to decipher. It is important to remember that the private sector in the UK has accelerated in December, and that’s why economics expect positive prints overall.

Eyes might turn on the monthly GDP, as last time around it turned negative, showing a contraction in UK’s economy. A second month-on-month contraction will change the landscape for the UK’s economy.

Cable has lost significant points over the course of the past two weeks. At the danger of losing that critical level, the next support lies by the 200-week average near 1.3115. Below there, there is no clear-cut support until 1.2920. Inversely, the top side sees resistance at 1.3329 and 1.3439.

Canadian jobs to reaffirm hikes

Canada’s economic data have been on sound footing recently, owing to a natural rebound post-omicron and oil prices rising to multiyear highs. With Canada having lifted lockdowns after the previous jobs release, 120k jobs are expected to be added to Canada’s labor force. As a reminder, 200k jobs were seen removed from the jobs market last month, the worst dataset in a year. Will BoC receive the numbers expected to go on an aggressive hiking cycle?

Negative data will increase the chances of USDCAD reaching resistance at 1.28 and perhaps even 1.2878. On the other hand, a good report would send prices down to 1.2631 and 1.2555. Although unlikely, if the prices fluctuate more during the week, 1.2964 and 1.2451 are the far-end key levels to keep an eye on.

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