Important calendar events
The dollar dipped on Monday on reduced Fed rate hike expectations later in the week and the dollar index sank to 103.3. US Treasury yields remained mostly stable on Monday, with the US 10-year bond yielding approximately 3.5%.
US inflation data last week showed that price pressures are decelerating, but at a slower pace than anticipated. US CPI rose by 0.4% in February, which showed that inflation cooled slightly from January’s 0.5% print. Inflation fell for the eighth consecutive month in February, as US headline inflation in February dropped to 6.0% year-on-year from 6.4% in January. The pace of core CPI, on the other hand, accelerated in February. Core CPI, which excludes food and energy, rose by 0.5% in February from a 0.4% growth in January. PPI data last week was more encouraging, indicating that the process of disinflation is underway.
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.
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%.
The Federal Reserve is holding its highly anticipated monetary policy meeting this week on the 22nd. The Fed is meeting against an increasingly uncertain economic backdrop this week, as the global banking crisis has changed market expectations.
Even though price pressures remain high, the Fed may be pondering a pivot in its monetary policy. Market rate hike bets have been completely repriced within the past couple of weeks. Markets were pricing in a 50-basis point rate hike for this week’s meeting, but now the odds are that the Fed will downshift to a 25-bp hike. Some analysts even maintain that the Fed might pause rate hikes completely this week as concerns about a banking sector meltdown remain high.
Markets are pricing in 100 basis points of rate cuts by the end of the year from the peak policy rate this summer. The Fed may have to discontinue its tightening policy, to prioritize financial stability over its fight against inflation.
The Euro gained strength against the dollar on Monday, with EUR/USD rising above the 1.073 level. If the currency pair goes up, it may encounter resistance near 1.075. If the EUR/USD pair declines, it may find support at 1.053.
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%. 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 forcing the EU Central Bank to continue raising interest rates.
The ECB raised interest rates by another 50 bp at last week's monetary policy meeting, bringing its main refinancing rate to 3.5%. The ECB statement after the conclusion of the meeting stressed that the increasing uncertainty highlights the importance of a data-driven approach to monetary policy moving forward. ECB President Christine Lagarde refrained from committing to future rate increases. Lagarde stated that current financial tensions may bring inflations down and do some of the work that would otherwise be done by monetary policy.
Banking sector woes have been transferred across the Atlantic to Europe. On Monday, Switzerland’s UBS AG agreed to buy Credit Suisse, which was facing liquidity problems.
Recent GDP painted a grim picture of the Eurozone economy. The GDP print for the final quarter of 2022 was zero, indicating that the EU economy is stagnating and recession looms.
German ZEW Economic Sentiment and EU ZEW Economic Sentiment are due on Tuesday and may affect the Euro.
The GBP/USD pair edged higher on Monday, testing the resistance at the 1.227 level. If the GBP/USD rate goes up, it may encounter resistance near 1.245, while support may be found near 1.200.
Recent GDP data showed that the UK economy expanded by 0.3% in January, beating expectations of a 0.1% growth. The IMF, however, has 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.
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 of the pressure on the BOE to continue its economic tightening.
The BOE raised interest rates by 50 bp at its February meeting, bringing the official bank rate to 4.0%. The next BOE monetary policy meeting is scheduled for this week on Thursday, just a day after the Fed’s hotly-anticipated meeting.
Market expectations on the outcome of the next BOE policy meeting fluctuate. Markets odds are currently split between a 25-bp rate hike and a pause in rate hikes. The recent global banking crisis has reduced interest raise expectations, as most governments are concerned that further tightening may result in a meltdown in the troubled sector.
USD/JPY edged lower on Monday, dropping to the 131.2 level. Potential contagion in the banking sector drove investors to seek safer assets within the past week, boosting the Yen. If the USD/JPY pair declines, it may find support near 127.2. If the pair climbs, it may find resistance at 138.
The Bank of Japan maintained an ultra-easy policy at the monetary policy meeting last week, putting pressure on the Yen. Japanese policymakers maintained ultra-low interest rates at the BOJ’s January meeting, keeping the central bank’s refinancing rate at -0.10%. This was the last meeting for BOJ Governor Haruhiko Kuroda, whose term in office is ending on April 9th, after remaining at the helm of the BOJ for a decade.
Upcoming BOJ Governor Ueda has hinted at the possibility of tweaking the central bank’s bond yield curve control in the future. However, he has cautioned against sudden changes in monetary policy and stated that he intends to maintain its current ultra-easy policy for now.
Final GDP data for Q4 of 2022 have shown that the Japanese economy has reached stagnation. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy. The final GDP Price Index printed slightly higher than expected, with a 1.2% annual expansion, versus the 1.1% predicted.
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.
This week the main driver for the USD/JPY pair is expected to be the dollar’s direction, as the highly anticipated Fed meeting on the 22nd is drawing near. Fresh developments in the banking sector crisis may also cause volatility in the currency pair.
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