The U.S. Dollar's rout continued in the past week, where it was impacted by political jawboning. This time, it was the U.S. Treasury Secretary, Steven Mnuchin, who seemingly reversed a 25-year-old strong Dollar policy.
Mnuchin's statement was contradicted 24 hours later by U.S. President Donald Trump, who said that he would expect the U.S. Dollar to get "stronger and stronger" during an interview on CNBC. But that didn't help the Dollar recover much — and it fell to a fresh 3-year low.
This week, eyes will turn back to the fundamentals driving the global economy: Tuesday's German CPI data, Wednesday's FOMC statement, and Friday's U.S. employment report. Here's why.
1. Tuesday's German CPI Data
During last week's European Central Bank (ECB) meeting, ECB President Mario Draghi said that "volatility" in the exchange rate was "a source of uncertainty" that required monitoring. And given the inflationary headwinds of a stronger currency, he would not expect to raise interest rates at all in 2018.
This week, that view will be put to the test as German CPI data is released. The market is expecting year over year inflation to be at 1.7%, matching the prior reading. Germany is still the most important economy in the EU, and inflation in that economy would bear the most weight at the ECB.
The real question here is what the Euro's reaction will be — and if it will match with the data. If the currency strengthens on weak data or fails to strengthen on strong data, that will be a very important sign as to the health of the trend.
2. Wednesday's FOMC Statement
Last week, Jerome Powell was confirmed by the U.S. Senate to head the Federal Reserve Open Market Committee (FOMC) when Chair Yellen's term ends this week.
The market will look to the FOMC's statement this week for the first indication on what a Chair Powell might tweak. The Fed has done an extremely good job telegraphing its next move and providing the market with plenty of time to adjust. So any minor changes to the language will be parsed so closely to determine if it's a subtle Powell change or just continuing the course.
Right now, the Fed is expected to hike rates next at the March meeting, Powell's first as chair. Barring unforeseen circumstances, that hike will happen. But it's really the path forward from there that the market is concerned with. Are three hikes still on the table for all of 2018, or will the FOMC take a more cautious tone? All of that will be the subject of close analysis and debate this week.
3. Friday's U.S. Jobs Data
This is arguably the most important number to the U.S. economy. It will move the U.S. Dollar as it undoubtedly impacts the interest rate outlook. Expectations are that the U.S. economy added 180,000 jobs in January, compared with 148,000 in December. The unemployment rate is expected to remain steady at 4.1%.
Again, it's important to closely watch the market reaction following the data. If the data points one way, but the market does the opposite, we would take that as a strong sign in the next move. Weak data accompanied by a stronger USD might suggest the Dollar sell-off is fizzling. Strong data accompanied by a weaker USD suggests that there's much more room to go.