Blockbuster Week of Risk Events to Spark Volatility

Lukman Otunuga
Published: Jan 31, 2023, 09:55 GMT+00:00

Fasten your seatbelts for potential market volatility.

Wall Street, FX Empire

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Written on 31/01/2023 by Lukman Otunuga, Senior Research Analyst at FXTM

Get ready for a mighty few days of market thrills and spills as we buckle ourselves in for a risk calendar not seen in a very long time. We get to hear and see several major central bank decisions, megacap tech titan earnings results and top tier economic data releases including the monthly US non-farm payrolls report which rounds off a week like very few others. Volatility in terms of the VIX, Wall Street’s fear gauge, has been moribund recently and below its long-term average. Other measures of price movement are also relatively tepid, so expect this to change in the next few days.

The new year has started with some unexpected positivity as risk markets enjoy the new found growth prospects emanating from parts of the world that only a few months ago were seen as down n’out. China’s reopening after the relaxation of its strict zero-Covid policy has fuelled the bulls in Asia and supports global growth. The euro zone has benefitted strongly from this surprise while the warmer winter and lower gas prices have seen the region’s depressing growth forecasts ripped up in favour of more encouraging numbers.

Central Bank Guidance Key

Meanwhile central banks are closer to the end than the beginning of their tightening cycle and rate hike journey. This week sees the FOMC, Bank of England and ECB all announce their latest policy decisions within the space of 20 hours or so. The focus might actually be a case more of what the central bankers say, rather than what they do this time around. Markets are well priced for a 25bp hike from the Fed tomorrow, and a 50bp rate rise from the BoE and ECB.

Key will be what Fed Chair Powell says both in the statement and his press conference. The world’s most powerful central bank is expected to stick with its recent hawkish rhetoric. Markets have bet on interest rate cuts towards the end of this year which is in contrast to recent Fedspeak which has banged the drum for continued rate hikes, albeit smaller moves, to combat still elevated inflation. The net result of this could be a pick-up in demand for the beaten down dollar which is on track for four monthly losses which has not been seen since July 2020.

Watch Out for ECB Hawks…

The ECB will potentially be the most hawkish G20 central bank by the end of the week. Inflation is worrying the hawks and yesterday’s Spanish HICP figures were a nasty surprise for the supporters of easing price pressures. President Lagarde is expected to say that the ECB’s work is far from done and this may cement another 50bp rate hike in March and underpin support for the euro. We get the latest January flash inflation figures for the region ahead of the meeting tomorrow. Eagle eyes will watch out for the core figures which are expected to remain sticky.

Super Thursday Super Suspense

Finally, the Bank of England is expected to deliver another half-point rate rise, although this is a closer call among watchers of the Old Lady. It’s a “Super Thursday” so the bank will update its growth and inflation forecasts. A steeper than expected cut in the latter could mean a sooner-than-expected end to the bank’s tightening cycle and likely weigh on GBP.

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About the Author

Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency and commodity markets.

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