US Dollar and the Euro set to take center stage this week

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Dollar

The markets return to a full new trading week of the year and the first week promises to be packed with a lot of economic fundamentals. Of particular interest will be the US Federal Reserve meeting minutes from December, which the markets will be acutely tuned to, reading into what went on during the December meeting. Focus will be given to the discussions behind the wording of urging the markets to be ‘patient’ in respect to the interest rate hikes.

Considering that the January FOMC statement will not be followed up by a press conference, the markets at large expect the Federal Reserve to continue to maintain its status quo without much change to the statement’s language. In this regards, the FOMC meeting minutes from December could well provide the much needed fodder for the markets at least for the month of January.

Meanwhile, across the pond, the Eurozone will be gearing up for its CPI releases for the month of December. With Spain’s CPI already showing deflation, posting -1.1% CPI, the market expectations have turned bearish for CPI readings from other countries such as Italy, France and Germany and the Eurozone composite CPI as well.

Of interest will be the headline CPI expectations for Eurozone which is expected to flat line, after months of stalling at0.3%. With the shift in the CPI reading, should they turn out to be below estimates, the next question that comes to mind is to how aggressive the ECB will be and also on the timing of the QE announcement. The ECB is slated to hold its first monthly monetary policy conference on 25th January which could provide initial glimpses to the ECB’s plans for purchasing sovereign bonds.

The week will also see the US monthly nonfarm payroll data but expectations are for a softer reading after last month’s job growth saw a solid posting of over 300k. The unemployment rate is also expected to improve to 5.7%, from the current levels of 5.8% which could well be another factor that could continue to push the US Dollar higher against its peers.

Technically speaking, EURUSD broke down in holiday thinned trading period below 1.2237, a support level that was last seen in 2010. The next minor support comes in at 1.1786. However factoring in an alternative view, which is an expectation of a CPI surprise in the Eurozone to the upside along with a dovish FOMC meeting minutes could squeeze out the shorts in the EURUSD in the short term, which could see a modest rally back to the broken support level of 1.2237. This is however wishful thinking considering that the EURUSD closed the month of December 2014 on a very note, indicating more downside in the pair in the coming months.

EURUSDMonthly

All said and done, the EURUSD looks poised for further declines in the months ahead with the shift in sentiment now questioning the scope and size of the QE bond purchases from the ECB.

Look for a possible retracement to the broken support level near 1.2237, which could then pave way for declines to the next support at 1.1786.

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