FX Weekly Overview (Brazil Issue)
Dollar to reflect US economic data, Central Bank minutes, inflation in Brazil, and the Middle East
Leonel Mattos
- Currencies
While Monitoring Trade War Headlines, Watch: Chinese Lending; US CPI; Chairman Powell’s Testimony
By: John Kicklighter, Head of Market Research
While Monitoring Trade War Headlines, Watch: Chinese Lending; US CPI; Chairman Powell’s Testimony
Talking Points:
- The greatest volatility follows the development of the unknown – and there are few things as unpredictable as Trump trade war policies
- China’s place in the trade crosshairs and its economic outlook make scheduled event risk this week particularly important
- US rate forecasts will be stirred with the most recent CPI release as well as Fed Chairman Powell’s congressional testimony
As is typically the case in normal weeks, there is plenty of high-profile event risk to register over the coming week. How impactful this scheduled event risk proves has a lot to do with the ‘surprise’ quotient of these events and the market’s eager reception of the updates. I will certainly watch top event risk – and how much impact it has on the broader markets going forward – but I am far more sensitive to the unscheduled catalysts that can come down the line.
Chart of S&P 500 with VIX and 20-Day ATR (Daily)
Source: John Kicklighter, TradingView
US President Trump has threatened possible ‘reciprocal tariffs’ against the entire world this past week. That could either be interpreted as a serious escalation of trade restriction and thereby growth potential, or it could be simply overlooked on the expectation that the course will be reversed once again. It would be wise not to overlook these threats and their potential to upend confidence in the broader markets’ stability.
Calendar of Top Global Macro Event Risk
Source: John Kicklighter
In contrast to the unknown and unscheduled, there is meaningful global macro data to consider in the equation for broader market function heading forward. I will be particularly mindful of Chinese data hitting the wires against the backdrop of US trade threats. There are a few notable Chinese events due over the coming week, but the new lending figure for this past month may be the most important milestone for a suggested recovery in the economy.
How much money is the government dedicating to fuel a steadfast recovery amid broad moderation through the developed world? This update will be a public show of the effort – and perhaps an unflatteringly one at that, considering how much external support is necessary to keep the calm.
Chart of USDCNH Overlaid with Ratio of Shanghai Composite-Dow Jones Industrial Average (Daily)
Source: John Kicklighter, TradingView
Through the rest of the week, there is some event risk that is worth seeking out (reasoning behind BOC policy decision, Mexico auto productions amid trade wars, etc), but my focus will shift back onto the US docket and the country’s benchmark assets. Wednesday will be a big session for the calendar. Up first, the January US consumer price index (CPI) is due to hit the wires with great expectations as to government support amid economic uncertainties.
Given Powell and company have recently pulled the central bank out of its dovish dive, there may be a close focus here to see if macroeconomics could offset trade war concerns to justify further edging the market from a neutral rest-of-2025 or perhaps even set the bedrock for an actual rate hike in 2025.
Chart of US Core CPI Year-Over-Year and UofM Inflation Expectations (Monthly)
Source: John Kicklighter, TradingView
Growth developments and waves of market sentiment considered, we are also risking an outlier risk for the US dollar and indices. Trump remains the most pressing risk of sudden reversal or acceleration of prevailing trends – no matter their previous charge. That said, don’t write off the impact that the Congressional drilling of Fed Chairman Jerome Powell faces when he gives testimony. Should there be any major changes in his composure – or certainly his expectations around what is ahead for the economy or benchmark rate – be prepared for potentially significant volatility.
Congress is leaning more heavily in the GOP’s favor nowadays with Donald Trump voicing his displeasure with the Chairman and the new Treasury Secretary issuing thinly veiled threats to do the ‘right thing’. Can Powell continue to lead the argument to keep rates from falling further in 2025 or will he be tripped up in ad hominem attacks?
Chart of DXY Dollar Index Overlaid with Implied FOMC Change Through 2025 (Daily)
Source: John Kicklighter, TradingView
--- Written by John Kicklighter, Global Head of Content
- Currencies
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