The week begins with markets reacting to the US Government shutdown, however very quickly this will be overtaken by key tier one economic data, with major central banks and a first look at how the US economy performed into the end of 2017. We consider the outlook for forex, equity indices and commodities markets this week.
The first monetary policy meetings of 2018 for the major central banks begin this week. However, After all the hype of the early weeks of the year regarding the prospect of a shift towards a tighter monetary policy stance, could this week be filled with disappointment? Expectations moving into the Bank of Japan meeting on Tuesday are pretty low, but given that the 10 year JGB yield edged close to 0.10% again last week and the yen has been stronger, Governor Kuroda could use the opportunity of the press conference to calm talk about BoJ tightening in the near term. This could weigh on the yen. It is probably still at least six months too early to expect the BoJ to begin the moves towards tightening but this will still not stop the market from speculating especially if the 10 year JGB yield tops 0.10% consistently. However, much more action could come out of the ECB meeting on Thursday. Although no change to rates (main refi at zero, deposit at -0.4%) or the asset purchase program (€30bn per month until September) is expected, could the ECB change the language of its forward guidance. ECB rhetoric has been more hawkish (especially from Estonia’s Ardo Hanssen suggesting the ECB could end QE in one go in September), but Draghi runs a pretty dovish Governing Council and given the recent strength of the euro, the risk would be for a dovish surprise. Given the market is long the euro at record levels could this drive a retracement move this week?
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