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The Week Ahead: Weak dollar in focus amid Fed decision, US jobs data

For the past week, all eyes have been on the World Economic Forum in Davos, Switzerland, where US President Trump and others moved markets, especially the US dollar, with their comments. Earlier in the week, US Treasury Secretary Mnuchin stated in Davos that a weak dollar is positive for US trade. This caused a further selloff for the US dollar on Wednesday and Thursday.

Mnuchin later backed off on these comments, acknowledging that he shouldn't be discussing dollar valuation, and finally even stated on Friday that a strong dollar is in the best interests of the U.S. President Trump also jumped in, saying that Mnuchin was being misinterpreted, and that the dollar will get ‘stronger and stronger’. But much damage had already been done, prompting the US dollar index to plunge well below the key 90.00 handle, establishing yet a new multi-year low, and the EUR/USD to hit a new multi-year high above 1.2500 before pulling back modestly.

But for the EUR/USD, it wasn't just a falling dollar that pushed the currency pair to a new high – the euro was also boosted by an unexpectedly more hawkish European Central Bank on Thursday. Although the ECB kept interest rates on hold as expected, there was increased optimism in ECB President Mario Draghi’s comments, even despite prior expectations that Draghi would attempt to talk down the high-flying euro. As of Friday, EUR/USD remained just off its 1.2500-area highs.

As the Davos forum was winding down on Friday, UK GDP came in better than expected, which prompted the surprisingly strong British pound to remain supported near its long-term highs against both the US dollar and Japanese yen. GBP/USD remained aloft not far off Thursday’s 1.4345 high. In contrast, US GDP came in worse than expected, which kept some continued pressure weighing on the dollar.

The week ahead will be a busy one and will once again be focused on the beleaguered US dollar. Dominating the schedule will be the first FOMC meeting of the year concluding on Wednesday, followed by the monthly US jobs report on Friday. The Federal Reserve is not expected to raise interest rates or make any substantive changes to monetary policy on Wednesday at the conclusion of its two-day meeting, but the Fed’s comments and outlook, as usual, will likely set the tone for monetary policy going forward into 2018. As for the jobs report, current expectations are hovering around 185K jobs added in January, after a relatively disappointing 148K jobs added in December.

Also in the week ahead, Wednesday features Australia’s CPI inflation report, US ADP private jobs data and Canadian GDP, in addition to the noted Fed decision. Thursday brings both US and UK manufacturing PMI data, and Friday highlights not only the US jobs report (focusing on non-farm payrolls, the unemployment rate, and wage growth) but also the UK’s construction PMI data.

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