The weakness of the dollar has been a key market factor in recent weeks, but there is a raft of key tier one economic data this week which could turn the tables. Purchasing managers surveys, FOMC minutes and culminating with Non-farm Payrolls on Friday, dollar traders have much to digest and much to drive direction. Coming into this week what is the outlook for forex, equities and commodities?
It comes with some relief that central banks are once more taking the lead in driving forex markets. After so many months of political risk being a major factor, markets are finally coming back to focusing on interest rate differentials once more. This has come as the significant divergence on monetary policy suddenly seems set to narrow. Central bankers seemed to make an arguably co-ordinated move to suddenly talk up their currencies, as the ECB’s Draghi,. Bank of England’s Carney and Bank of Canada’s Poloz all seemed to shift to a far less dovish position on monetary policy. The ECB sees deflationary forces being replaced with reflationary forces, the Bank of England will need to start the discussion on tighter monetary policy in the coming months and the Bank of Canada believes that its low interest rates have “done their job”. Suddenly expectations of rate hikes are soaring and the Fed may not be alone for too much longer as the only tightening central banks in the majors. For the ECB, inflation trends are coming through improved bank lending and wages rather than commodity prices, suggesting there is a sustainability to these trends. Eurozone forward inflation expectations have jumped from +1.5% to +1.6% in the past week. The less dovish positions of the ECB and Bank of England (you could not saw they are explicitly hawkish quite yet) is driving euro and sterling strength and puts the dollar under strain.