Get ready for volatility this week

January 16, 2017 09:00 AM

Traders hoping for volatility to pick up are likely to be lucky in the week ahead with many key moving events. For the past two months markets were dominated by the Trump trade but this has now clearly cooled down in the past two weeks with the U.S. equities and U.S. dollar pausing for a break.

Profit taking took place last week after Donald Trump failed to revive the rally by not providing fresh catalysts on his economic stimulus plans at a press conference on Wednesday.  But the elected President will take office on Jan. 20 and will be given the chance to address the American people on the direction he’s planning to take the country in the next four years. While we can’t know for certain what his inauguration speech will entail, many hope he will provide more clarity on the key themes highlighted during his campaign. However, the certain thing is we’re going to see more volatility in 2017 when compared to 2016, so good luck traders.

Ahead of the inauguration, several Fed presidents are due to speak including Fed Chair Janet Yellen. Most monetary policy makers agree that three interest rate hikes is a very possible scenario even though the markets only believe two will take place. The past has proven that markets had a better judgment on the path of interest rates, however, this time it’s more challenging due to a major unknown factor may influence projections -- fiscal stimulus plans. How much of the fiscal plans will be implemented depends largely on how fast Trump can get the congress green light, the faster Trump gets the green light the higher the dollar likely to go.

U.S. markets will be closed Monday to commemorate Martin Luther King. The U.S. economic calendar begins to heat up on Wednesday with the release of inflation data and industrial production followed by housing starts and building permits on Thursday. It’s another important week for U.S. financials with Morgan Stanley, Goldman Sachs, and Citi due to release their Q4 earnings.

Pound traders will be anxiously awaiting Theresa May's Brexit speech on Tuesday. Whether the British pound/U.S. dollar (GBP/USD) currency pair will fall below 1.2 or climb above 1.25 depends a lot on the revealed strategy. Her speech should clearly state whether she’s willing to fight for remaining in the European Union’s single market or choose the hard way. However, things may change if the Supreme Court decided that May needs to secure the consent of Parliament before triggering article 50, possibly delaying Brexit for couple of months, and thus provide sterling a boost. 

The European Central Bank will be meeting on Thursday and most likely keep monetary policy unchanged after the central bank extended and reduced the monthly bond purchases to €60 from €80 in their last meeting. Although it might be considered a non-event, we’ll be carefully listening to Draghi to see if the recent improvement in Eurozone data especially when it comes to inflation, will force the ECB to start considering unwinding their quantitative easing policies. Any signs of tapering will be positive for the Euro.

About the Author

Hussein Sayed is chief market strategist at FXTM.