Important calendar events
The dollar retreated on Wednesday, with the dollar index dropping to the 101.4 level. US Treasury yields rose slightly, with the US 10-year bond yielding approximately 3.42%.
The dollar has been weakening in the past few weeks against rivalling currencies. Stability has been gradually returning to the Banking sector, removing some of the incentives to invest in safe-haven currencies, such as the dollar.
US economic data released on Wednesday was overall positive, providing support for the dollar. Durable Goods Orders rose by 3.2% in March, against expectations of a 0.7% growth. This was a significant improvement over February’s decline of 1.2%. Core Durable Goods Orders, which exclude transportation items, rose by 0.3% in March beating estimates of a 0.2% decline.
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%. The Federal Reserve is holding its next policy meeting in May and market odds are in favor of a 25-basis point rate hike rather than a pause in rate hikes. Markets are anticipating a pause in rate hikes after this last interest raise and a high probability of rate cuts starting in November, depending on economic conditions and inflationary pressures.
Recent US inflation data showed that price pressures are decelerating. US Consumer Price Index went down to 5.0% year-on-year in March from 6.0% in February. Monthly CPI rose by just 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.
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.
There is no Fed commentary this week, as the Fed’s blackout period has started, ahead of the next policy meeting on May 3rd.
Several strong indicators of economic activity are due on Thursday and may affect the dollar. These include Advance GDP, Advance GDP Price Index, Unemployment Claims, and Pending Home Sales. Advance GDP especially for the first quarter of the year is the primary gauge of the economy's health.
The Euro gained strength on Wednesday on positive economic data for the EU. EUR/USD climbed above the 1.106 level, testing the resistance near 1.107. If the currency pair goes up, it may encounter resistance near 1.107. If the EUR/USD pair declines, it may find support at 1.083.
German GfK consumer confidence data on Wednesday rose for the 7th consecutive month, providing support for the Euro. German GfK Consumer Climate in April rose to -25.7 from -29.3 in March. April’s print was still pessimistic, remaining firmly below zero. The less negative value, however, indicates rising consumer optimism around future income expectations.
Hawkish ECB rhetoric provided support for the Euro this week. ECB member Philip Lane stated that the central bank will need to raise interest rates again at its next policy meeting. ECB’s Isabel Schnabel was even more hawkish, hinting that a 50-basis point rate hike is not off the table.
ECB Vice President Luis de Guindos stated last week that the ECB is unlikely to return to providing forward guidance on its next policy moves given the uncertainty in the outlook. De Guindos further warned that this approach will likely be maintained until the evolution of inflation and the effects of the ECB’s measures become clearer.
The ECB raised interest rates by 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.
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.
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 benefitted from the dollar decline on Wednesday, with the GBP/USD pair climbing to the 1.245 level. If the GBP/USD rate goes up, it may encounter resistance near 1.254, while support may be found near 1.235.
UK Public Sector Net Borrowing data released on Tuesday exceeded expectations, rising to a staggering 20.7B in March from 12.5B in April. This was Britain’s second-highest March borrowing since records started in 1993.
CPI data last week showed that inflation in the UK remains high. Headline inflation remained above the 10% level for the 7th consecutive month, dropping to 10.1% year-on-year in March 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. British Chancellor Jeremy Hunt stated that the CPI figures show that efforts to drive inflation down must continue.
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 after last week’s hot inflation print. 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.
USD/JPY traded sideways on Wednesday, oscillating around the 133.6 level. If the USD/JPY pair declines, it may find support near 132. If the pair climbs, it may find resistance at 135.1.
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 March was hotter than expected, at 3.2% on an annual basis, against expectations of a 3.1% 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.
The BOJ interest rate decision this week is expected to attract considerable market attention. The BOJ Monetary policy meeting on the 28th will be the first meeting that newly-appointed Governor Kazuo Ueda will be called to preside over. Kazuo Ueda has replaced Haruhiko Kuroda, whose term in office ended on April 9th, becoming the BOJ's 32nd governor. Ueda will be faced with the challenge of normalizing Japan’s monetary policy after prolonged easing.
In an interview on Tuesday, Ueda reiterated the importance of maintaining the Bank’s ultra-loose policy for now, to keep inflation from falling below the 2% target. Ueda however, hinted at a change in policy if inflation and wage growth overshoot expectations.
Japanese policymakers maintained ultra-low interest rates at the BOJ policy meeting in March, keeping the central bank’s refinancing rate at -0.10%. The BOJ is likely to keep a dovish stance at its meeting this week. The BOJ is expected to maintain its ultra-easy monetary policy, including its interest rate targets. However, recent reports indicate that Ueda may be gearing up for a change in policy later in the year. The BOJ is planning to conduct a review of the impact of its easing policies, with discussions starting at this week’s meeting. This might be the prelude to a shift in the BOJ’s monetary 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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