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Important calendar events
After declining last week, the dollar rallied on Monday, with the index rising to the 102.2 level. US Treasury yields rose slightly, with the US 10-year bond yielding approximately 3.55%.
US fundamentals on Monday were more optimistic than expected, bolstering the dollar. ISM Manufacturing PMI remained below the threshold of 50 which denotes industry contraction in April. April’s 47.1 print, however, exceeded expectations of 46.8 and went above March’s 46.3 value, indicating improved conditions in the manufacturing sector. ISM Manufacturing Prices rose to 53.2 in April from 49.2 in March, beating expectations of 49.4. A print above 50 indicates rising prices and is a leading indicator of consumer inflation.
Advance GDP data last week for the first quarter of the year were mostly disappointing, pushing the dollar down. GDP data showed that the US economy expanded by 1.1% against expectations of 2% and a 2.6% growth in Q4 of 2022. Advance GDP Price Index on the other hand rose by 4.0% in Q1 of 2023, versus 3.7% expected. This index is a measure of inflation and indicates that price pressures remain high. US Unemployment Claims on Thursday were more optimistic than anticipated at 230K, dropping below expectations of 247K.
Key inflation data released last week showed that US inflation rose slightly in March. The core PCE Price Index, which is the Fed’s preferred inflation gauge, rose by 0.3% in March, in line with expectations. On an annual basis, core PCE increased by 4.6%, beating expectations for a 4.5% growth.
US Consumer Price Index went down to 5.0% year-on-year in March from 6.0% in February. Monthly CPI rose by 0.1% in March, indicating that inflation cooled significantly from February’s 0.4% print. Core CPI, which excludes food and energy, was in line with expectations, rising by 0.4% every month. PPI data last week fell below expectations, strengthening the notion that inflationary pressures are easing. PPI in March dropped by 0.5%, against expectations of remaining the same as in February.
The Federal Reserve raised interest rates by only 25 basis points at its meeting in March, bringing the benchmark interest rate to a target range of 4.75% to 5.00%.
There is no Fed commentary this week, as the Fed is in a blackout period, ahead of the next policy meeting on May 3rd. This week, the market will focus primarily on the Fed’s monetary policy decision. Policymakers are expected to raise interest rates by 25 basis points at Wednesday’s meeting, but the rate hike has already been priced in. Traders will focus mostly on the FOMC statement and press conference for forward guidance. Hints for a halt in rate hikes and a pivot to a more dovish policy are expected to weaken the dollar further.
Markets are anticipating a pause in rate hikes after this last interest raise. There is a high probability of rate cuts starting in November, depending on economic conditions and inflationary pressures. The US Central Bank has signaled that its hawkish policy is coming to an end, as inflationary pressures are receding. In addition, prolonged tightening is putting the economy at risk and the recent turmoil in the banking sector has increased recession concerns.
Several strong economic indicators are due on Tuesday, especially JOLTS job openings. The dollar is expected to be especially sensitive to the release of economic data this week, ahead of the Fed monetary policy meeting on Wednesday.
The Euro retreated against the dollar on Monday and EUR/USD plummeted to the 1.096 level. If the currency pair goes up, it may encounter resistance near 1.109. If the EUR/USD pair declines, it may find support at 1.091.
The EUR/USD pair is expected to exhibit high volatility, as the Fed and ECB monetary policy meetings are coming up this week. The Fed rate decision is due on the 3rd and the ECB policy meeting is just one day later, on the 4th.
The ECB raised interest rates by 50 bp at its monetary policy meeting in March, bringing its main refinancing rate to 3.5%. Market odds are in favor of a 25-bp ECB rate hike this week and the interest rate increase has already been priced in. Inflationary pressures in the EU remain high and the ECB is not expected to signal a pause in rate hikes just yet.
The ECB, however, is expected to reassess its policy direction ahead of its next meeting in June. EU policymakers must take a lot of variables into account, including the effect of economic tightening on the now fragile banking sector. ECB Vice President Luis de Guindos has warned that the ECB is unlikely to provide forward guidance on its next policy moves given the uncertainty in the outlook.
Headline inflation in the Eurozone eased to 6.9% year-on-year in March from 8.5 % in February, against expectations of a 7.1% print. Core CPI, which excludes food and energy, went up slightly to 5.7% on an annual basis in March from 5.6% in February, hitting a record high.
Preliminary GDP Flash data released last week for the Eurozone were disappointing, putting pressure on the Euro. Flash GDP for the first quarter of the year rose to 0.1%, registering a small improvement against the 0 print for the final quarter of 2022. The print was lower than the consensus estimate of 0.2% growth, indicating very slow economic expansion in the EU.
Important fundamentals are due on Tuesday for some of the leading economies in the EU and for the Eurozone as a whole. The most important of these is inflation CPI and Core CPI data, which may affect the Euro considerably ahead of the ECB monetary policy meeting later in the week.
The Sterling lost strength against the dollar on Monday and the GBP/USD pair dropped to 1.258. If the GBP/USD rate goes up, it may encounter resistance near 1.258, while support may be found near 1.236.
British headline inflation remained above the 10% level in March, dropping to 10.1% year-on-year from 10.5% in February. Even though inflation showed signs of cooling, it exceeded expectations of a 9.8% print. Price pressures remain high in the UK, forcing the BOE to continue its policy of economic tightening at the risk of economic recession.
The BOE raised interest rates by 25 bp at its meeting in March, bringing the official bank rate to 4.25%. BOE is expected to continue hiking rates by 25-bp at its next policy meeting in May. Market odds are in favor of more BOE rate hikes up ahead. The BOE is not likely to pause rate hikes yet and many analysts predict no rate cuts at all within the year if inflation remains high.
The UK economy registered stagnation in March according to recent GDP data. Monthly GDP dropped to zero, falling below expectations of 0.1% expansion. In addition, the IMF 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.
Several important economic indicators are scheduled to be released on Tuesday for the UK and may affect the Sterling. These include: BRC Shop Price Index, Nationwide HPI, and Final Manufacturing PMI
The dollar gained strength on Monday, pushing the rivaling Yen down and USD/JPY climbed to the 137.5 level. If the USD/JPY pair declines, it may find support near 133. If the pair climbs, it may find resistance at 138.1.
The Yen lost strength last week after the BOJ decided to continue its dovish monetary policy. Last week’s monetary policy meeting was the first one with the newly-appointed BOJ Governor Kazuo Ueda at the helm. Kazuo Ueda has replaced Haruhiko Kuroda, whose term in office ended on April 9th, becoming the BOJ's 32nd governor.
Japanese policymakers maintained ultra-low interest rates at the BOJ policy meeting on Friday, keeping the central bank’s refinancing rate at -0.10%. The BOJ interest rate decision was largely expected by markets and had already been priced in. The BOJ issued a statement that was more dovish than anticipated, however, putting pressure on the Yen.
The BOJ modified its forward guidance slightly at last week’s meeting, by removing a pledge to keep interest rates at current or lower levels. In addition, the BOJ announced a review of the impact of its easing policies with a planned time frame of around one to one-and-a-half years. This signals a policy change down the road, although it is clear that the BOJ does not have any immediate plans to pivot to a more hawkish policy. On the other hand, the BOJ sent mixed messages to markets, by announcing that its Yield Curve Control Policy will remain unchanged. Many market participants were expecting a more hawkish forward guidance and the Yen plummeted.
BOJ Core CPI rose to 2.9% in March on an annual basis from 2.7% in February. March’s print exceeded expectations of a 2.6% growth, indicating that price pressures in Japan continue to rise.
National Core CPI remained unchanged at 3.1% year-on-year in March. Tokyo Core CPI for April was hotter than expected, at 3.5% on an annual basis, against expectations of a 3.2% print. Inflation in Japan remains steadily above the BOJ’s 2% target, 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.
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 1.1% predicted.
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Written by:
Myrsini Giannouli
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