Important calendar events
The dollar dipped on Monday, and the dollar index dropped to 104.2. US Treasury yields were steady, with the US 10-year bond yield of approximately 3.96%.
Fed rhetoric is expected to be one of the main drivers of the dollar this week. Traders are eagerly anticipating Fed Chair Powell’s testimony before the Senate Banking Committee on the 7th and 8th. Powell will appear before Congress on Tuesday and Wednesday to deliver the Fed’s Semi-annual Monetary Policy Report. Increased volatility in dollar price is expected, as market participants will scan Powell’s speeches for hints on the Fed’s future policy.
The Federal Reserve raised interest rates by only 25 basis points at its February meeting, bringing the benchmark interest rate to a target range of 4.50% to 4.75%. Rate hikes have become less aggressive and may continue at their current pace, but the Fed might raise interest rates for longer than previously expected. This means there are likely still a few rate hikes ahead, which may support the dollar. Current market odds lean towards further tightening in the upcoming Fed meetings and an increase in interest rates up to 5.25%.
US inflation data showed that price pressures in the US remain high and are not easing at the pace anticipated. Core PCE, which is the Fed’s primary inflation gauge, came in hotter than expected, rising by 0.6% in January against predictions of a 0.4% raise.
US headline inflation in January dropped to 6.4% year-on-year versus the 6.2% expected. PPI data also surprised markets to the upside, rising by 0.7% in January against expectations of a 0.4% raise and a 0.2% drop in December. Recent US inflation data highlight the risk of inflation becoming entrenched. Sticky inflation may induce the Fed to rethink its recent dovish pivot.
Preliminary GDP for the final quarter of 2022 was disappointing, showing that the US economy expanded by 2.7% against expectations of a 2.9% growth.
Several economic activity data are due on Tuesday for the dollar, including Final Wholesale Inventories, IBD/TIPP Economic Optimism, and Consumer Credit.
The Euro gained strength on Monday as the dollar weakened, and EUR/USD climbed to 1.069. If the currency pair goes up, it may encounter resistance near 1.070. If the EUR/USD pair declines, it may find support at 1.053.
Economic activity data for the EU on Monday were disappointing, putting pressure on the Euro. Sentix Investor Confidence dropped to -11.1 in March from -8.0 in February, with a negative print denoting pessimism.EU Retail Sales in January rose by 0.3% but fell short of expectations of a 0.7% gain.
Headline inflation in the Eurozone eased to 8.5% on an annual basis in February from 8.65 in January. Markets were predicting that inflation would cool to 8.2%. Even though February’s inflation print was higher than expected, the Euro dropped on Thursday, as national readings in recent days pointed to an even higher print. Core CPI, which excludes food and energy, went up by 0.8% in February and core inflation hit a record high of 5.6% year-on-year. Sticky price pressures in the Eurozone are likely to affect ECB policy, forcing the EU Central Bank to continue raising interest rates.
The ECB raised interest rates by another 50 bp at its February meeting, bringing its main refinancing rate to 3.0%. ECB President Christine Lagarde has emphasized that the central bank aims to bring inflation down to its 2% target. Lagarde confirmed that another 50-bp rate hike would follow at the next monetary policy meeting in March, after which the ECB would re-evaluate its policy. Market odds are currently favoring an increase of the ECB refinancing rate to 4.0% by June.
ECB rhetoric is expected to affect the Euro significantly this week. Market participants will pay special attention to ECB President Lagarde’s speech on the 8th for hints into the central bank’s future policy.
The Sterling traded sideways against the dollar on Monday, with GBP/USD fluctuating around the 1.202 level. If the GBP/USD rate goes up, it may encounter resistance near 1.214, while support may be found near 1.192.
UK Construction PMI data on Monday showed that British construction activity has grown at its fastest pace in nine months in February, boosting the Sterling. Construction PMI rose to 54.6 in February from 48.4 in January versus the 48.7 expected.
BOE members continue to be divided on the central bank’s future policy direction and market expectations on the outcome of the next policy meeting fluctuate. The BOE raised interest rates by 50 bp at its February meeting, bringing the official bank rate to 4.0%. Markets are currently pricing in a 25-bp rate at the next BOE policy meeting. Several market participants though believe that the British central bank will pause rate hikes completely.
UK headline inflation cooled at a higher pace than anticipated, dropping to 10.1% year-on-year in January from 10.5% in December. Cooling inflation rates remove some pressure on the BOE to continue its economic tightening.
Recent GDP data showed that the British economy is slowing down. The British economy contracted by 0.5% in December, which was more pessimistic than the 0.3% expected. Preliminary GDP for the final quarter of 2022 showed stagnation, while GDP for 2022 came in at 4.1%. The IMF downgraded the UK’s growth forecast, predicting that the British economy will contract by 0.6% this year, which is also consistent with BOE forecasts.
The UK’s grim economic outlook limits policymakers’ ability to increase interest rates sufficiently to rein in inflation. The British economy is struggling, and policymakers will have to assess how much tightening it can withstand to bring inflation down.
BRC Retail Sales Monitor and Halifax HPI data are scheduled to be released on Tuesday for the UK and may affect the Sterling somewhat.
The Yen traded sideways against the dollar on Monday and USD/JPY oscillated around the 136.0 level If the USD/JPY pair declines, it may find support near 134. If the pair climbs, it may find resistance at 138.2.
This week all eyes are going to be on the Bank of Japan and the monetary policy meeting on March 10th. Incumbent BOJ Governor Haruhiko Kuroda’s term is ending on April 9th, and this is going to be the last policy meeting he is going to preside over after remaining at the helm of the BOJ for a decade. Departing BOJ Governor Kuroda has been persistently dovish throughout all this time and is expected to defend the central bank’s ultra-easy policy till the very end.
The Yen has been exhibiting high volatility over the past couple of weeks as developments on the succession of the BOJ Governor are front and center in the news. Incumbent BOJ Governor Kuroda is a staunch supporter of an ultra-loose monetary policy and his term in office expires in April. Kuroda’s successor, Kazuo Ueda, has attracted the market’s attention in the past couple of weeks.
Most market analysts consider that Ueda will likely not be in a hurry to unwind the BOJ’s ultra-easy policy, but as yet his intentions remain unclear. Ueda has already appeared twice before the Japanese government's lower house known as the Diet. Markets eagerly awaited his testimony for signs of a pivot in BOJ policy but as yet Ueda remains non-committal. Upcoming BOJ Governor Ueda hinted at the possibility of tweaking the central bank’s bond yield curve control in the future. However, he cautioned against sudden changes in monetary policy.
Japanese policymakers maintained ultra-low interest rates at the BOJ’s January meeting, keeping the central bank’s refinancing rate at -0.10%. Preliminary GDP data for the final quarter of 2022 showed a minimal economic expansion of 0.2%. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy.
Headline inflation in Japan has gone above the BOJ’s 2% target, touching 40-year highs and putting pressure on businesses and households. Increased price pressures and wages, raise concerns of a wage-price spiral and may force the BOJ to pivot towards a more hawkish policy. Tokyo Core CPI for February slowed for the first time since January 2022, dropping to 3.3% against expectations of a 4.5% print.
Average Cash Earnings are scheduled to be released on Tuesday for Japan and may affect the Yen ahead of the BOJ meeting later in the week.
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