WEEKLY FOREX OUTLOOK: FEB. 26

The US dollar had a positive week. The minutes of the Federal Reserve’s January meeting showed that the members of the central bank expected higher inflation and were more confident of the need to keep raising interest rates.

The euro will remain under pressure because of political uncertainty ahead of Italy’s national election on March 4. For now, the level of 1.25 looks like a significant obstacle for the pair. The main risk is a so-called “hung” parliament, which won’t be able to make any decisions. At the same time, if Italy avoids such outcome, the euro will get a boost. Traders also await the ECB meeting on March 8. The central bank may raise growth and inflation forecasts and hint to the end in monetary stimulus. Given these potential future bullish drivers, we think that any declines in EUR/USD will be temporary.

The main drivers of the British pound area Brexit negotiations news and expectations about Bank of England’s rate hikes, which fluctuate between high and low. We expect this instability to continue. The dynamics of GBP/USD will highly depend on what happens next. Support is at 1.3770.

Japanese yen is doing fine against AUD, NZD, EUR, GBP as the prospect of a faster pace of US rate hikes soured investors’ risk sentiment. Key levels for USD/JPY are 110.00 and 105.00.

Economic calendar

The key thing to watch will be the congressional testimony on monetary policy of the Fed’s chairman Jerome Powell on Wednesday, Feb. 28.

It will be interesting to have a look at Chinese manufacturing data on Wednesday to know how this big economy is doing. At the same day, we’ll get the euro area’s inflation and the second estimate of the US GDP growth in Q4.

Thursday will be very important for AUD: the country will release private capital expenditure index. This is one of the main indicators of Australian economic health and we have no doubts that it will move the market.

Britain will release Manufacturing PMI on Thursday and Construction PMI on Friday. US ISM Manufacturing PMI on Thursday and Canada’s GDP on Friday will be also important.