Top Market Opportunities 31.01.2022 – 04.02.2022

31 January 2022 Amega

Banks Take Centre Stage

Apart from the Luna year starting in China on Tuesday, the easing of covid restrictions in Europe might offer a glimpse of optimism in the markets should tension around Ukraine and Russia don’t escalate. The UK might be treated with a bit more sensitivity, too, as Boris Johnson’s ongoing police investigation has not concluded as of yet. Fortunately, a busy week on the economice frond is ahead for all trades. At least data releases tend to offer more tangible and immediate trading opportunities, especially those related to interest rates and employment. And we have a handful of those this week.

Will the RBA Provide Necessary Guidance?

Kicking the month of February off on the 1st, the RBA is expected to leave rates unchanged.

Westpack analysts anticipate the bank will revise its inflation and unemployment forecasts from 2.25% to 2.5% and 4.25% to 4% for 2022 on February 4 – respectively. The central bank achieved its underlying inflation target for the first time in eight years, as announced in November, and these revisions will be consistent with its forecasts.

Other significant revisions will be on GDP and wages. Although GDP was forecast at 5.5% in November, wages are far from the bank’s desired 3% target, but incoming data hint at rising pressures due to underemployment. If wages get revised upwardly from 2.5 to only 2.75% instead of 3%, markets might be discouraged. But it will be a potential announcement on bond-buying impacting the market most.

If RBA does not cease asset purchases at the February meeting, Aussie will probably continue its recent Fed-inflicted descent towards 0.68. A positive RBA could offer a relief up to 0.71 and 0.7165 next.

BoE Unlikely to Surprise This Time Around

On Thursday, February 4, we have the busiest day for the week, with both the BoE and ECB announcing their policy decisions.

UK’s bank is expected to throw its first back-to-back hike in eighteen years amidst rising inflation and rising inflation expectations. The government estimates that CPI can reach 7.1%, other banks forecast a figure close to the government’s forecast. With the UK’s inflation tied to brent and energy prices on the way up and expected to increase even more on the back of rising geopolitical tensions, the MPC is likely to ignore last week’s GDP miss and respond with a hike. Can this set precedence?

Detailed guidance is not expected so that the pound will be most impacted by the rate decision itself rather than asset purchases or revisions. Arguably, inflation revisions will matter in any case. A reduction of the government’s bond holdings should follow if UK’s central bank hikes nevertheless.

If the BoE hikes and signals a pattern for consecutive increases pound could be supported and a move towards 1.3673 might be in the boons . If, however, the bank does not provide such guidance, the cable could continue to decline or remain neutral between 1.3236 and the top resistance. Only if BoE surprises with a ‘hold’ would this add downside pressure on the pound , and potentially break towards 1.30.

ECB Has to Remain Slightly Hawiksh

Forty-five minutes after BoE’s decision, the focus will shift on the ECB. The European Central Bank is not expected to hike rates, of course. However, communication will be important as the bank has not provided any signals for a hike yet. With inflation on the rise and oil prices working out favorably on inflation, the market will most probably focus on Tuesday’s GDP and inflation figures. Although, even the recent rise in inflation is unlikely to work its way to too much hawkish speculation, as the drivers are supply-driven, not demand.

As the ECB is still far from hiking and way behind the Fed in getting back to normalization, only a reduction in asset purchases can be taken positively by the markets. But the EBC is expected to keep communication similar to Decemebner’s announcement as they don’t want to be seen as dovish or hawkish at this early stage of economic recovery.

Euro could survive a drop below 1.1114 against the dollar on Thursday, but if the NFP is positive it’ll probably move to the next level of support at 1.1021. On the flip side, some hawkishness could drive the pair to 1.12, perhaps 1.1240 with 1.13 and higher levels coming on the spotlight only if the NFP (including wages) come out much worse than expected.

NFP Data Could Change Rates Speculation

And to close off the week on the economic calendar, the US will report its latest Non-farm payrolls on Friday 4.

After Fed’s Powell announced a likely March hike, employment numbers become way more critical to whether the committee makes hike a reality or not, especially following last month’s huge miss from 425k consensus to a mere 200k jobs added. The unemployment rate, however, returned to pre-pandemic levels at 3.9%. Can it remain unchanged with most jobs unfilled? Wages data coming above expectation at 5.2% will likely lead to a positive impact on USD, but expectations for hikes might quickly reverse without jobs improving.

The US has a busy week in general, with ISM, jobless claims, and the ADP itself preparing Friday’s stage. On a different note, Facebook and Amazon take centre stage this week and might impact how markets expect the dollar to fair over the next few weeks.

If the US data indicates trouble for Fed’s speculated hikes, priced in at 5 as of now, the SPX would be supported as dollar will be likely impacted negatively. Once and if the 4448 resistance breaks, the index couldbe revisiting the 50% Fibo at 4519 next. Positive US data might add more pressure on the SPX and send it down to 4221, and even lower towards the 4k area.

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