In our Investment Bank Outlook each week, we bring you a selection of perspectives from leading investment banks to outline the key issues and directional views for the week ahead. These excerpts, taken from research notes, will cover issues such as key market themes, economic releases, as well as any major trends and levels to watch. Please note, this material, which does not reflect the opinions of Tickmill, is provided for educational purposes only and should not be taken as an investment recommendation.

Danske Bank

FX markets

The deflationary pressure in markets is likely to continue in the coming week as PMIs failed to impress and virus concerns continue. In turn, we continue moving towards the need for further monetary support if market pricing of inflation and EM tailwinds are to continue. We expect USD/JPY to stay below 109 and the pressure on EUR/USD will thus likely continue. The key event is Wednesday when the Fed may choose to verbally intervene somewhat and alleviate broad upwards pressure on the USD, but we view such as less likely. Note that speculative positioning did not move in the first couple of days after the corona virus outbreak. Hence, the latest IMM positioning data showed a build of JPY short positions and retaining of WTI crude longs – see IMM Positioning Update, 26 January.

We have a very interesting week ahead of us in the UK. Not only is the UK leaving the EU on Friday 31 January, but more important for the FX space is the Bank of England’s monetary policy announcement on Thursday. We expect a 25bp cut, which would lead to a higher EUR/GBP, probably back above 0.85. In case we are wrong, we expect EUR/GBP below 0.84. We do not have many data releases ahead of the Bank of England’s decision but watch out for the CBI retail indicators tomorrow. Lloyds Business Barometer released the night between Wednesday and Thursday is not interesting given the Bank of England is voting on Wednesday (announcement Thursday). Disregard the outcome of the decision Thursday, we think more GBP weakness is in the cards during the year, notably, because Brexit fears are likely to return eventually

ING

EUR: Stabilising eurozone data unlikely to translate into stronger euro

  • Eurozone data should confirm the Jan ECB meeting assessment of incoming data pointing to a stabilisation of growth dynamics and indications of a moderate increase in underlying inflation. German Jan IFO (Mon) is set to increase and core EZ Jan CPI (Fri) is to stay at 1.3%YoY. Still, as was the case after the ECB meeting, this does not mean a stronger euro as such as outcomes are (a) in line with ECB expectations, and thus (b) don’t necessarily lead to a need to loosen policy stance. EUR attractive funding characteristics to remain intact.
  • The key data event of the week is the Fed meeting (Wed). Following the easing of trade tensions, the Fed is to reiterate the message of stability in monetary policy for now. The largely unchanged message should not lead to either a material move in the dollar or a more meaningful repricing of the US rate path. The latter was recently more driven by the China virus-related concerns (which led to lower rates globally) rather than US specific considerations. With the Fed unlikely to induce a dovish repricing of the US curve (and thus softer USD) we continue to look for a broader EUR/USD stability with a modest bearish bias towards EUR/USD 1.1000.

JPY: Defcon 4

  • Risk markets are carefully monitoring the spread of the coronavirus. 2020 has so far been a good year for asset markets and the impact of the virus has largely been contained to Chinese markets. In the FX space, the JPY has shown a little out-performance on the crosses, but the FX options market is so far showing no real signs of alarm. We see USD/JPY nudging down to the 109.00 area, with Chinese markets being closed until Friday for the Lunar New Year perhaps limiting the fall-out on asset prices.
  • We doubt the Fed will have too much impact on USD/JPY this week and, from the Japanese side, we’ll receive updates on Tokyo CPI, Employment, Industrial Production and Retail Sales. At its recent meeting, the BoJ modestly upgraded growth and downgraded its inflation forecasts to leave its complicated monetary policy unchanged. It is hard to see BoJ policy having much impact on the JPY this year.

GBP: Close Call but BOE To Remain on Hold

  • The market is split on the odds of a Bank of England rate cut, pricing in a 50% probability of a cut. Although this has reduced from 70% prior to the better than expected UK PMIs on Friday, the pricing is still meaningful. Our economists expect the bank to err on the side of caution and to remain on hold. This is a close call with four MPC members possibly voting for the cut.
  • This has two implications for GBP: (1) GBP is likely to appreciate in response to an on-hold decision, because of that 50% probability of a cut being priced in. (2) The scale of the GBP upside may not be pronounced as the uncertainty about the UK economic data and the tightest voting margin behind the BoE decision not to cut rates suggest that the market will continue pricing a non-negligible probability of a cut in coming months. So the market will postpone the expectations of the cut rather than fully reverse it. In the same way GBP reacted to the Jan UK PMI, sterling reaction to the on-hold decision may also be muted.

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