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US CPI, Retail sales, USD/JPY......

Video Script

Hi everyone, Happy New Year and thanks for tuning into another week ahead for forex and financial markets. Is it time to start buying the US dollar again? This is the question I will answer as we enter the second week of 2022 in light of last week’s Fed minutes, which prompted quite a large reaction in markets - not just in forex - but in stocks and bonds too. I will of course also rundown the highlights of this week’s economic calendar, including US CPI and retail sales data.


The two big events of last week were Fed minutes and non-farm payrolls. To quickly summarise the minutes, US central bankers have now started talking about reducing the size of the Fed’s balance sheet. That’s a hawkish shift from just talking about so-called ‘tapering’ because it means not just stopping buying bonds, but actually selling them back to the market.


The effect here is quite straightforward. There will be a greater supply of bonds - so if demand for bonds cannot keep up with the extra supply – the price of bonds should fall and yields should rise. Higher yields make stocks, especially highly valued stocks like tech stocks less attractive - and if the rise in yields is not matched by similar moves overseas like in Europe, the UK and Japan - the dollar stands to gain against the euro, British pound and yen respectively. In fact, this has already been happening with respect to the yen because USD/JPY just hit 116 for the first time in five years.


As far as stock indices go, the US jobs numbers possibly play a bigger role. If the Fed is boxing itself into a corner where it has to tighten monetary policy because of inflation but the labour market shows the economy is slowing, then that is bad news for corporate America and would be a headwind to stocks. Otherwise, if the jobs market keeps improving, then high inflation can be taken as part of a strong economy.


Before I move on to discuss the news highlights this week - please remember to give this video a quick THUMBS UP for the youtube algorithm.  Thanks very much!


Right, let's move on to this week’s economic calendar highlights. Inflation remains the hot topic as we head into 2022. Just look at the unrest in Kazakhstan where one of the primary causes of the unrest has been protest over high fuel prices.


First up on the inflation front we have both CPI and PPI data from China. As a manufacturing and export-based economy, the PPI figures tend to be more meaningful for markets and in November PPI was at a colossal 12.9%. This potentially poses a problem for Chinese policymakers this year as problems in the property sector will make hiking rates to combat inflation difficult.


We have a couple of top tier data points out of the US, which I suspect could steal the attention of forex traders this week - that’s CPI and retail sales. US consumer price inflation data for December will be especially notable after the hawkish Fed minutes last week. If CPI remains at current levels or even picks up, this will reinforce the view at the Fed that the US central bank needs to start reducing the size of its balance sheet sooner. A more hawkish Fed could see funds flow back to the US dollar after its retracement during December.


Right thanks everyone, good luck trading this week and make sure to click on subscribe so you don’t miss the next episode of the week ahead.

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