USD, Trump executive orders and NFP, GBP and Article 50, JPY Bond Buying 

USD: Trump’s executive orders a distraction from positive macro $ story The dollar is slightly softer in holiday-thinned Asia, with investors demanding a small concession for Trump’s seemingly erratic Executive Orders. The focus here is on the start of Trump’s extreme vetting of immigrants announced Friday, orders which have already been partially reversed by the US courts. That said, we would expect the focus to shift back to the US macro story this week, which looks a dollar positive. As outlined in our team’s FOMC Crib Sheet, we see the Fed potentially sounding less relaxed on inflation at Wednesday’s FOMC meeting. We think at 33% the probability of a March Fed rate hike is priced too low and that the dollar could rally 1-2% against the low yielders on a more hawkish statement. Additionally, the US labour market report (Fri) should show solid Jan average hourly earnings (2.6% YoY) and above consensus NFP (180k). Coupled with the solid US Q4 GDP last Fri (particularly in the context of the strong 3.5% YoY Q3 growth), we see this as being a positive week for the dollar. Favour DXY breaking above 101.00/101.30 resistance this week.

EUR: Higher CPI may cause a headache for the ECB this week The focus is on the January German CPI today which should give us a gentle preview for tomorrow’s flash EZ CPI. We are likely to see another spike higher (due to base effects), towards 2%. While this should add fuel to calls within Germany for ECB policy tightening, for now the effect on the near term ECB outlook should be limited (even if EZ CPI should move to 1.4% tomorrow). This is because the ECB policy stance for the remainder of the year is “fixed” (the commitment to €60bn monthly asset purchases). With inflation expectations rising but the ECB keeping policy rates on the floor, real interest rates should move more negative and be bearish for the EUR.

GBP: Article 50 to be debated this week It looks as though Article 50 will be debated Tuesday night in parliament with a preliminary vote on Wednesday – although a binding vote is not scheduled until Feb 8th it seems. This week will also see a Super Thursday at the BoE, where the MPC will decide on rates and release the February inflation report. The market is still quite short GBP, but we think a messy debate on Article 50 plus the strong dollar story can keep Cable capped near 1.2600 this week.

JPY: BOJ bond buying in focus. Tomorrow’s BoJ meeting has a little more focus than usual in that the BoJ is struggling to keep 10 year JGB yields near 0%. At 8GMT/CET tomorrow, the BoJ announces its bond buying schedule for February. Any increases/tweaks in the JGB buying scheme looks JPY negative. We see $/JPY to 116.80 this week.