Article Highlights

  • U.S. labor market conditions index up from 0.6 to 1.3 in January
  • ECB Governor Draghi: Underlying inflation still subdued
  • Draghi: ECB is prepared to increase QE in terms of size and duration
  • FOMC member Harker: Potential rate hike in March?
  • Harker: Needs to see further GDP growth and strengthening jobs market
  • Australia’s AIG construction index improved from 47.0 to 47.7
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The U.S. dollar chalked up another mixed performance against its peers while the Japanese yen took advantage of the risk-off vibes.

Major Events:

ECB Governor Draghi’s speech  – The ECB head honcho had a scheduled speech in front of the European Parliament’s Economic and Monetary Affairs Committee in Brussels so forex junkies tuned in closely to his remarks on inflation and QE. As in his recent testimonies, Draghi downplayed the pickup in the region’s headline inflation figures, explaining that the jump was mostly spurred by energy prices and that underlying measures are still subdued.

Because of that, Draghi maintained that monetary policy support is still necessary, adding that the central bank is ready to increase the size and duration of the program is necessary. So much for tapering expectations! Draghi assured that they’re seeing sufficient liquidity in the bond market but they continue to look at other measures of inflation to gauge if the rise in price levels can be sustained.

FOMC member Harker’s testimony – Philadelphia Fed President Patrick Harker is part of the U.S. central bank’s inner circle tasked to vote on monetary policy changes. As such, market watchers paid close attention to his latest speech to scour for clues about the Fed’s next moves.

In his testimony in San Diego, Harker confirmed that he supports the idea of having three interest rate hikes this year and that March should be a contender for a tightening announcement. He did specify that this would depend on how the economy and fiscal policy evolves, and that he would need to see further GDP growth and strengthening of the jobs market to vote for a hike. In particular, he mentioned that he’d like to see continued wage growth since this will translate to stronger inflation down the line.

When asked about how he thinks the Trump administration could affect the U.S. economy, Harker carefully responded that he hasn’t seen any details on tax reform and infrastructure spending yet to gauge how these could influence their policy bias. As for Trump’s financial deregulation plans, Harker stressed that legislation has contributed to stability and urged caution in making changes.

Risk aversion back in the game? – U.S. equities closed lower for the day as the Fed’s labor market conditions index jumped from 0.6 to 1.3, increasing the likelihood for an interest rate hike sooner rather than later. The S&P 500 index was down 0.25%, the Nasdaq inched 0.10% lower, and the Dow fell 0.14% as businesses and investors weighed the impact of potentially higher borrowing costs.

Major Market Movers:

JPY – The Japanese yen sprang back to action as the lower-yielding currency was in a better position to take advantage of the risk-off flows.

USD/JPY tumbled from 112.54 to a low of 111.62, EUR/JPY dropped from 120.88 to a low of 119.73, GBP/JPY fell from 140.55 to test support at the 139.50 handle, and CAD/JPY is down to 85.50.

Watch Out For:

See also:

London Session Recap

Asian Session Recap

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