The dollar was mixed against the major last week and generally range bound. NOK, CHF, and SEK outperformed while EUR, NZD, and AUD underperformed. Q4 GDP growth in the U.S. surprised to the upside, while forward-looking indicators like the PMIs and consumer confidence are consistent with continued strength in U.S. economic activity. In contrast, the indicators point to sluggish eurozone growth prospects and so risks for the dollar remain skewed to the upside this week as there is room for Fed funds future pricing to converge towards the FOMC’s projections. Indeed, the FOMC meeting along with labor market data (JOLTS and NFP) have the potential to trigger an upward adjustment to U.S. interest rate expectations in favor of the dollar.

AMERICAS

The two-day FOMC meetings ends Wednesday with a decision. No change in policy is expected. The discussions about slowing and eventually ending Quantitative Tightening are likely to continue but we believe it is too early to announce any changes at this meeting. Updated macro forecasts and Dot Plots won’t come until the March meeting.

Chair Powell’s press conference will be key. Recall that at the December meeting, the FOMC statement was fairly balanced but was totally overshadowed by Chair Powell’s ultra-dovish press conference. Recall also that in the days following that meeting, many Fed officials pushed back against the market reaction to Powell and they continued to do so right up to the current quiet period. We believe Powell will take a more balanced stance at this meeting, especially given how robust the economy remains.

Growth remains strong in Q1. The Atlanta Fed’s GDPNow model’s first estimate came in at 3.0% SAAR. Elsewhere, the New York Fed’s Nowcast model’s estimate rose to 2.8% SAAR vs. 2.4% previously. Its estimates for Q2 will begin about one month before the start of the quarter. Of note, actual Q4 growth came in at 3.3% SAAR and was the sixth straight quarter of above trend growth. If momentum carries over into Q1 as we expect, we are likely to see a seventh straight quarter.

Data highlight will be the January jobs report Friday. Bloomberg consensus sees 180k jobs added vs. 216k in December, while its whisper number stands at 179k. We see upside risks. Given the recent history of revisions, however, there is a good chance the previous two months increases will be revised down. That would not take away from the underlying message that the labor market remains robust. Unemployment is expected to rise a tick to 3.8%, while average hourly earnings are expected to remain steady at 4.1% y/y. Ahead of the jobs report, ADP reports its private sector jobs estimate Wednesday and is expected at 148k vs. 164k in December.

Other labor market data will be reported. December JOLTS data will be reported Tuesday. Openings are expected at 8.709 mln vs. 8.790 mln in November but keep an eye on layoffs and hires. The ongoing moderation in labor demand has not been enough to lead to a higher unemployment rate. The job vacancy rate fell from a high of 7.4% in March 2022 to 5.3% in November. According to research by Fed Governor Waller, the vacancy rate would need to fall below 4.5% in order to lead to a significant increase in the unemployment rate. Q4 employment cost index will be reported Wednesday. January Challenger job cuts, Q4 unit labor costs and non-farm productivity, and weekly jobless claims will be reported Thursday.

We get some key January PMI readings. Regional Fed surveys wrap up with Dallas Fed manufacturing index Monday and its services index Tuesday. Chicago PMI will be reported Wednesday and is expected at 48.0 vs. 47.2 in December. ISM manufacturing will be reported Thursday and headline is expected at 47.0 vs. 47.4 in December. Keep an eye on employment and prices paid. Of note, S&P Global PMIs came in stronger than expected so we see upside risks to the ISM readings.

Consumer confidence will be closely watched. January Conference Board consumer confidence will be reported Tuesday. Headline is expected at 114.0 vs. 110.7 in December. Final January University of Michigan consumer sentiment will be reported Friday.

Other minor data will be reported. November FHFA and S&P CoreLogic house price indices will be reported Tuesday. December construction spending and January vehicle sales will be reported Thursday. December factory orders will be reported Friday.

Canada reports November GDP Wednesday. The preliminary GDP estimate points to growth of 0.1% m/m after three consecutive months of no growth, while the y/y rate is expected to remain steady at 0.9%. The Bank of Canada projects the economy to stall in Q4 as inventory drawdown offsets tailwinds from exports. Last week, the Bank of Canada delivered the widely expected hold but no longer has a cautious tightening bias. The OIS curve suggests that the probability of a 25 bp rate cut in April stands around 60%.

EUROPE/MIDDLE EAST/AFRICA

Eurozone highlight will be January CPI data. Spain reports Tuesday. Its EU Harmonised inflation is expected at 3.1% y/y vs. 3.3% in December. France and Germany report Wednesday and their EU Harmonised rates are expected at 3.6% y/y and 3.1% y/y, respectively. Both would be down significantly from December. Italy and eurozone report Thursday. Italy’s EU Harmonised inflation is expected at 0.8% y/y vs. 0.5% in December. Lastly, headline eurozone inflation is expected at 2.7% y/y vs. 2.9% in December, while core inflation is expected at 3.2% y/y vs. 3.4% in November. Overall, declining underlying inflation in the eurozone and the poor domestic growth outlook suggest the ECB may not have to wait until June to cut the policy rate. Interest rate futures imply 20% and 85% probabilities of a cut in March or April, respectively.

The ECB’s dovish communication last week has weighed on the euro. ECB President Christine Lagarde emphasized during her press conference that the debate over rate cuts was premature but reiterated that borrowing costs could be lowered from the summer. Lagarde also did not lean against aggressive money market expectations of the ECB’s easing cycle. ECB policymakers are likely to continue pushing back. Guindos speaks twice Monday. Vujcic, Lane, Vasle, and Nagel speak Tuesday. Centeno and Lane speak Thursday. Centeno speaks again Friday and Saturday.

Eurozone Q4 GDP data will be reported Tuesday. Headline growth is expected at -0.1%, same as Q3. Looking at the country breakdown, Germany is expected at -0.3% q/q vs. -0.1% in Q3, France is expected at 0.1% q/q vs. -0.1% in Q3, Italy is expected at 0.0% q/q vs. 0.1% in Q3, and Spain is expected at 0.2% q/q vs. 0.3% in Q3. Forward-looking survey indicators point to downside risk to growth.

Final eurozone January manufacturing PMI will be reported Thursday. Italy and Spain report for the first time and are expected at 46.9 and 48.0, respectively. Both would be significantly higher than December.

Retail sales data will be reported. Spain and Germany both report Wednesday, with Germany expected at 0.5% m/m vs. -2.2% in November. Germany also reports January unemployment Wednesday. France reports December IP Friday.

Bank of England meeting ends Thursday with a decision. The bank is widely expected to leave the policy rate at 5.25%. However, the risk is that it lays the groundwork for a less restrictive stance with its updated macro forecasts. We note that inflation pressures (private sector regular pay growth, services CPI, and headline CPI) have been lower than projected in the November Monetary Policy Report. Interest rate futures imply 100 bp of rate cuts this year, starting in Q2. However, the BOE may not be that dovish. First, positive UK real income growth offsets some of the drag to household wealth from weak housing market activity. Second, the S&P Global UK Services PMI rose to a seven-month high of 53.8 in January, consistent with a solid increase in business activity. Finally, the projected fiscal drag in 2024 will likely be softer as the Chancellor is expected to announce pre-election tax cuts in Spring Budget March 6.

BOE reports its January Decision Maker Panel inflation survey Thursday. 1-year inflation expectations are expected to fall two ticks to 3.8%. If so, it would be the lowest on record but still well above the 2% target.

U.K only reports some minor data this week. January BRC shop price index will be reported Monday. December consumer credit will be reported Tuesday. January Nationwide house price index will be reported Wednesday. Final January manufacturing PMI will be reported Thursday.

Riksbank meets Thursday and is expected to keep rates steady at 4.0%. However, the bank will likely trim its policy rate forecast because of clear indications that inflationary pressures are easing even as demand is slowing. The OIS curve implies a 25% probability of a 25 bp cut this week as well as 125 bp of total easing over the next 12 months. The Riksbank could also take more steps to normalize its balance sheet by increasing the pace of government bond sales. Indeed, at the November meeting, the bank said it is considering increasing the pace of sales of government bonds at this meeting.

ASIA

Bank of Japan releases its summary of opinions for the January meeting Wednesday. At that meeting, the bank left all policy settings unchanged. The macro forecasts were tweaked, with lower inflation suggesting little urgency to remove accommodation. The market sees liftoff at the June meeting, which seems about right.

Japan reports key December real sector data. Labor market data will be reported Tuesday. The unemployment rate is expected to remain steady at 2.5% while the job-to-applicant ratio is expected to remain steady at 1.28. Retail sales, IP, and housing starts will be reported Wednesday. Sales are expected at 5.1% y/y vs. 5.4% in November, IP is expected at 0.1% y/y vs. -1.4% in November, and starts are expected at -6.6% y/y vs. -8.5% in November. Final January manufacturing PMI will be reported Thursday.

Australia highlight will be CPI data Wednesday. Both December and Q4 CPI data will be reported. Headline is expected at 3.7% y/y in December vs. 4.3% in November. If so, this would be the lowest since December 2021 but still above the 2-3% target range. For Q4, both headline and trimmed mean inflation are expected at 4.3% y/y. Inflation remains stick and so the RBA is likely to keep rates on hold for some time. Cash rate futures imply less than 50 bp of rate cuts this year. Q4 PPI will be reported Friday.

Australia also reports December retail sales Tuesday. Sales are expected at -1.7% m/m vs. 2.0% in November, which were driven by Black Friday promotions. The RBA is concerned that current weakness in household consumption will persist for longer than expected. As such, a poor December retail sales print could further weigh on Australian interest rate futures and AUD. Private sector credit will be reported Wednesday. Final January manufacturing PMI and December building approvals will be reported Thursday. Home loans value will be reported Friday.

RBNZ Chief Economist Conway speaks Monday. He is expected to make brief comments on domestic data developments since the November Monetary Policy Statement. His comments will offer a preview of what to expect at the next RBNZ policy meeting February 28, when its macro forecasts will be updated and 2027 added to the forecast horizon. The RBNZ is expected to stay on hold in February and the OIS curve implies a 66% probability of a policy rate cut in May.