Potentially downbeat US macro surprises in January should be a key test of the strength of the dollar rally post-FOMC meeting. However, a possible disappointment, in my opinion, will be short-lived, since the Fed shouldn’t be spooked with one or bad reports. In addition, the driver of the slack is known, and it is also known that there is not so much uncertainty with it. The decline in tensions in Eastern Europe, the Chinese New Year creates more attractive conditions for the rally in risk assets and recovery of some currencies, in particular the AUD and GBP. The respective central banks that will meet this week are likely to surprise to the upside in their tightening plans.The dollar declines moderately on Monday, consolidating above previous local high (97 level). The key question is whether the dollar can weather possible weakness in US economic data in January without bearish consequences. Crucial ISM January activity indicators ADP and NFP reports are due this week and preliminary data for the second half December-first half of January indicates high risk of a negative surprise. The main argument for such expectations is that Omicron’s impact on economic activity fell on the period during which the data were collected.The market has probably prepared for a weak January in US economic data and will be able to quickly bring the focus back to expectations regarding the Fed’s March decision. A necessary condition for this would be a rebound, seen in the US economic data for February, which would confirm the hypothesis that the impact on activity due to Omicron was indeed transient and it didn’t halt the economic recovery.In terms of geopolitical risks, the situation also looks calmer. Consolidation of long-term rates in the US after a pullback before the Fed meeting, points to the possibility of a relief rally in risk assets, as well as currencies correlated with risk, such as AUD and GBP. The central banks of Australia and the UK are making interest rate decisions this week and are expected to try to keep up with the Fed. In particular, the Bank of England may raise interest rate by half a percentage point, which in principle is a sufficient condition for the end of asset purchases and the start of a discussion on balance sheet runoff. AUD and GBP risk is skewed to the upside against the dollar.In particular, AUDUSD bounced off the 0.70 horizontal support and an unexpected shift in RBA policy towards more tightening could help the pair move towards the upper boundary of the current bearish trend: Demand for risk in general could send the dollar index below 97 points, however some support should be expected at 96.85. US data, at least in line with forecasts, may already become a catalyst for continuation of the greenback rally, as expectations for the data are quite low.
Source: Tickmill
