Important calendar events
The dollar plummeted on Monday in the aftermath of the Silicon Valley Bank collapse, with the dollar index dropping below 103.5. US Treasury yields were similarly affected, with the US 10-year bond yield plunging to 3.45%.
The collapse of the Silicon Valley Bank on Friday has caused market chaos, with many assets experiencing high volatility. The Federal Reserve and US banking regulators stepped in over the weekend to assure investors that they would have access to their funds on Monday. Later on Friday, a smaller Bank, Signature Bank, fell victim to the panic created by the SVB collapse. The resulting run on the bank’s deposits led to the third-largest bank failure in U.S. history. President Biden and US regulators have sought to limit the damage to the banking system by announcing that the funds of customers of US banks would be protected.
Fed Chair Powell's testimonies before last week's US Congress were more hawkish than anticipated. Powell warned that the US central bank is prepared to accelerate the pace of tightening if price pressures remain high. 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%. Future rate hikes, however, will likely depend heavily on US employment and inflation data.
Last week market expectations of the Fed’s next rate hike bounced back and forth between 25-bp and 50-bp. Powel’s testimonies raised market odds of a 50-bp rate hike early in the week. The collapse of Silicon Valley Bank on Friday though brought market odds back down to 25-bp. This week some analysts predict that the Fed might even pause rate hikes completely until the crisis is over. The SVB collapse may steer the Fed towards a less hawkish direction, in fear of contagion in the financial sector.
Preliminary GDP for the final quarter of 2022 was disappointing, showing that the US economy expanded by 2.7% against a 2.9% growth expectation.
The latest 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.
This week a lot is riding on US inflation data, as they may very well determine the pace of future rate hikes. This week's most highly anticipated fundamentals are consumer inflation data (CPI) on the 14th and Producer price data (PPI) on the 15th. Market participants anxiously await US inflation results, which may determine the dollar’s trajectory in the coming weeks. The Consumer Price Index is forecast to decline to 6% year-on-year in February from 6.4% in January. If inflation eases as much as forecast, it may be enough to keep the Fed from returning to a 50-basis point rate hike. On the other hand, a hotter-than-expected inflation print may drive the Fed to accelerate the pace of rate hikes once again.
Markets were in turmoil on Monday and the EUR/USD rate exhibited high volatility, fluctuating between 1.065 and 1.075. If the currency pair goes up, it may encounter resistance near 1.080. If the EUR/USD pair declines, it may find support at 1.053.
Revised GDP data last week 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.
Headline inflation in the Eurozone eased to 8.5% annually 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.
ECB’s Lane stated last week that the central bank is likely to increase rates further to rein in Eurozone inflation, even if there are some signs that price pressures are easing.
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. Market odds are currently favoring an increase of the ECB refinancing rate to 4.0% by June.
One of the key economic events of this week is the ECB monetary policy meeting on the 16th, with the EU central bank expected to hike rates by 50 bp. ECB President Christine Lagarde has stated that they will continue their aggressively hawkish policy to press down on inflation. The ECB Press Conference following the conclusion of the meeting is expected to attract a lot of market attention. Traders will follow Lagarde’s statements closely for hints into the ECB’s future policy direction.
The GBP/USD rate was volatile on Monday, dropping to 1.205 in early trading, then rising to 1.220 as the dollar sank. If the GBP/USD rate goes up, it may encounter resistance near 1.227, while support may be found near 1.180.
GDP data released last week showed that the UK economy expanded by 0.3% in January, beating expectations of a 0.1% growth and December’s contraction by 0.5% in December. 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.
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. MPC member Swati Dhingra warned against further tightening last week, stating that it " poses a more material risk at this point."
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 of the pressure on the BOE to continue its economic tightening.
UK Unemployment Claims on Tuesday may cause some volatility in the Sterling price although the GBP/USD pair is expected to be driven primarily by the dollar’s trajectory this week.
The Yen gained strength on Monday as the dollar retreated, and USD/JPY dropped to 132.5. 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 last week's monetary policy meeting, 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.
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. Kuroda’s successor, Kazuo Ueda, has attracted market attention in the past few 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. 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 poor economic outlook raises 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.
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