This week’s key release in the financial markets is the February US non-farm payrolls data, which is due on Friday at 13:30. Will the US labour market continue to report strength in demand as well as shortages in supply? It would appear to be the most likely outcome, given that there has been no material shift in the underlying economic dynamics. The question is therefore whether this ongoing strength is having any effect on average earnings or investment intentions from businesses? The last few months have been surprising in the lack of growth in average earnings, and there has been precious little evidence that investment spending in the US is picking up to replace a lack of available workers, in my view. The US labour market report will feed market speculation about the scale of the Federal Reserve’s next move on interest rates, but it still seems unlikely that, so soon after reducing the pace of tightening, the Fed will look to increase it again, in my opinion. 

There is also activity data from the UK, in the form of January GDP (Gross Domestic Product), industrial production and services output, as well as German industrial orders and production data, also for January. These figures could report some recovery, but it is only likely to be a partial recovery from the drops seen in recent months. 

Recently, there has been more heat than light as far as the currency markets are concerned. GBPUSD has traded in a $1.1920 - 1.2150 range, while EURUSD has traded between $1.0530 - 1.0700. The daily moves have been sizeable, but it doesn’t look as if sellers or buyers are yet in control. Perhaps this is down to the uncertainty over the macroeconomic outlook for most economies, or it could be due to the conviction that markets seem to have, for where US, EUR and UK interest rates are heading in the short term. 

Whatever the reasons, the markets could well be tested towards the end of this week, with the US non-farm payrolls likely to shed some light on one of the major central bank meetings due over the next couple of weeks. There are few indications that the data between now and when those central bank meetings take place, will prove sufficiently surprising as such that it will alter that short term path, but we may see changes to predictions of the eventual peal in interest rates. If there is a shift, it feels as if the peak in Europe and the UK might be lower than what is already priced for, and the peak might be higher in the US. My gut feel is that the markets might be at risk of another test lower in GBP and EUR against the USD, and the JPY could also face a challenge with the Bank of Japan’s March monetary policy meeting due at the end of the week as well. 

This week sees a lot of central bank decisions due. The RBA (Reserve Bank of Australia), the NBP (National Bank of Poland), the BoC (Bank of Canada), the BNM (National Bank of Malaysia), the Peruvian central bank and the BoJ (Bank of Japan) all announce their decisions on interest rates. For most central banks, such as the NBP, BoC, BNM, central bank of Peru and BoJ, the expectation is that policy won’t change, whilst the RBA is likely to increase by 25 basis points, in spite of an easing in wage cost pressures.  

However, what is the end game for central banks? Are they trying to balance demand with supply, when the latter is subject to ongoing variance because of geopolitical and global health issues? The labour market issues are not going to be solved overnight, and in fact might not be solved at all, given that the cost of new investment to introduce greater automation is climbing at a time when consumers are feeling the pinch on spending. This question over rebalancing demand, is a theme that will likely dominate the financial markets for the coming months and could have a material effect on the way in which currencies trade this year, in my view.