Fundamental Comment

This Week: Services, rate decision by key central banks

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The most important events this week that could weigh on the movements of major currencies will be services reports from major economies as well as rate decisions by a number of key central banks.

Eyes will focus on services PMI for the month of January from China, euro area, U.K. and the United States. After the release of the manufacturing data last week, the services report should give a complete picture about the growth pace in the first month of 2018.

Central banks of Australia, New Zealand and U.K. will decide on monetary policy this week, amid expectations of seeing no significant change in their monetary stance.

US Dollar

As usual, the U.S. dollar failed to rebound from its lowest level in more than three years last week, as fears from rising U.S. bond yields and a potential federal government shutdown kept the green currency under pressure.

While the rising Treasury yields should have helped the dollar to soar, it failed as investors focused on signals that other major central banks would tighten monetary policy after the release of strong growth reports.

Even the strong U.S. non-farm payrolls figures could not give the dollar enough impetus to rebound, as the focus is more on inflation data that is likely to shape the future rate decision by the Federal Reserve.

Meanwhile, there are fears of another government shutdown as a deadline of February 8 looms, where the House and Senate have to pass a fifth short-term spending bill to avert a shutdown.

Lawmakers have been in budget talks for several weeks but failed to come out with an agreement amidst discrepancies between Republicans and Democrats regarding budget-spending plans.

This week, the most important data out of the U.S. will be the ISM non-manufacturing PMI, where last week’s manufacturing report posted the fastest expansion pace in more than 13 years in January.

Euro

The euro maintained its bullish direction last week, reporting its seventh straight weekly gain versus the U.S. dollar, reports showing the robust growth pace was likely to resume this year, thereby raising expectations the European Central Bank would end its bond purchases.

The final services PMI data from the euro area due this week could add more optimism about the growth momentum.

The ease in the euro area’s consumer prices inflation in the year ended January to 1.3 percent did not push the common currency lower.

In fact, the euro is more taking advantage of the weakness in the dollar, and thereby any rebound in the dollar is likely to provoke a beginning of downside correction in the euro.

Pound Sterling

The pound sterling gained against the dollar last week, taking advantage of the weakness in the dollar, where reports signaling a slowdown in both U.K. manufacturing and services failed to drag the pound lower.

However, this week investors will focus on the services sector figures, since the services is the predominant sector in the U.K. economy.

In addition, the sterling is benefitting from anticipations the Bank of England could hike interest rates in May after the economy showed better performance than the gloomy forecast made after Britain’s EU-departure referendum in 2016.

Investors are also expecting a Brexit deal between the U.K. and EU as a “no deal situation” would cost both economies hefty losses.

The BOE is likely to hold interest rates at 0.50 percent this week, but investors will carefully watch the quarterly inflation to see how the central bank will tackle the above-goal inflation.

Commodities

Gold faced some pressure the previous week on profit taking after hitting a 17-month peak at $1366.05 an ounce on January 25. 

Rebound attempts from the dollar also prompted some gold holders to sell until making sure the metal will continue its upside direction.

Some analysts predict that gold would take breather then continue its rally this year, where the next station would be $1400 an ounce.  

Regarding oil, it also calmed down after the latest tremendous gains after reports showing a rise in OPEC and U.S. crude production.

OPEC production rebounded in January from an eight-month low, while U.S. output surpassed 10 million barrels per day in November for the first time since 1970.

U.S. crude stockpiles probably plunged 0.48 million barrels in the week ended February 2, the EIA government report may show this week.

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