Important calendar events
The dollar weakened on Tuesday ahead of Wednesday’s CPI data, with the dollar index dropping to the 102.1 level. US Treasury yields remained stable, with the US 10-year bond yielding approximately 3.42%.
The precarious state of the banking sector has derailed the Federal Reserve’s plans for fighting inflation. 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 a lot of uncertainty and speculation on what the Fed is going to do at its next meeting in May as concerns about a banking sector meltdown remain high. Market odds on Monday moved in favor of another 25-basis point rate rather than a pause in rate hikes.
High volatility in dollar price is expected this week as the much-anticipated US inflation data are coming up.
US inflation data have shown 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 recent increase in oil prices, however, has re-ignited recession concerns, as the high cost of fuel is likely to increase price pressures.
Final GDP data for the final quarter of 2022 were disappointing, showing that the US economy expanded by 2.6% against expectations of a 2.7% growth.
High volatility in dollar price is expected on Wednesday as the much-anticipated US inflation data are due. US Consumer Price Index is forecast to decrease to 5.2% year-on-year in March from 6.0% in February. Core CPI is seen little change around 5.5% year-on-year. PPI data on the 13th will provide a more complete picture of the direction of US inflation. This week’s inflation data may be the deciding factor for the Fed’s next rate hike.
FOMC members’ speeches this week will be closely followed by traders for hints into the Fed’s future policy direction and are likely to affect the dollar. The minutes of the latest Fed meeting will also be released on Wednesday and may provide further insight into the Fed’s policy direction.
The Euro benefitted from the dollar’s weakness on Tuesday, with EUR/USD climbing to the 1.091 level. If the currency pair goes up, it may encounter resistance near 1.097. If the EUR/USD pair declines, it may find support at 1.078. The EUR/USD pair traded with low volatility on Tuesday after the Easter holiday. Traders await the release of important US economic data later in the week, which may show the direction of future rate hikes.
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.
The ECB raised interest rates by another 50 bp at its monetary policy meeting in March, bringing its main refinancing rate to 3.5%. The ECB stressed the importance of a data-driven approach to monetary policy moving forward. The ECB is likely to scale back future interest rate increases as EU inflation shows signs of cooling and the state of the banking sector remains critical.
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.
The Sterling rose against the dollar on Tuesday, as improved risk sentiment benefitted riskier assets. The GBP/USD pair rose after the Easter holiday, climbing to the 1.242 level. If the GBP/USD rate goes up, it may encounter resistance near 1.252, while support may be found near 1.218.
The BOE raised interest rates by 25 bp at its meeting in March, bringing the official bank rate to 4.25%. The decision was not unanimous, as 7 MPC members voted in favor of raising interest rates, while two members voted for 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. The BOE is expected to continue hiking rates by 25 bp at its next policy meeting in May, although some analysts predict a pause in rate hikes.
UK headline inflation rose to 10.5% year-on-year in February from 10.1% in January, versus expectations of a drop to 9.9%. Price pressures remain high in the UK, forcing the BOE to continue its policy of economic tightening at the risk of economic recession.
The UK economy expanded by 0.1% in the final quarter of 2022, against a preliminary estimate of economic stagnation. 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 Governor Andrew Bailey is due to speak about financial and price stability at the International Monetary Fund Spring Meetings on Wednesday and his speech may cause volatility in the price of the Sterling.
USD/JPY was volatile on Tuesday, testing the 133.7 level resistance. If the USD/JPY pair declines, it may find support near 129.6. If the pair climbs, it may find resistance at 137.9.
The Bank of Japan maintained an ultra-easy policy at its monetary policy meeting in March, 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 ended on April 9th, after remaining at the helm of the BOJ for a decade.
Economist Kazuo Ueda replaced Haruhiko Kuroda over the weekend, becoming the BOJ's 32nd governor. Ueda will be faced with the challenge of normalizing Japan’s monetary policy after prolonged easing.
Volatility in Yen price is expected this week as the new BOJ governor takes up his duties. Traders will be following Ueda’s speeches closely in the next few weeks, ahead of the BOJ policy meeting at the end of the month.
Ueda held a press conference on Monday vowing to continue the BOJ’s ultra-easy policy. The Yen weakened on Monday as the new BOJ governor said that he would carry out the monetary policy of his predecessor.
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.
National Core CPI was at 3.1% year-on-year in February. Tokyo Core CPI for March was hotter than expected, at 3.2% on an annual basis, against expectations of a 3.1% print. Inflation in Japan has gone 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.
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