Important calendar events
The dollar gained a little strength on Wednesday, but the dollar index remained below the 102 level. US Treasury yields dipped on Wednesday, with the US 10-year bond yielding approximately 3.5%.
Economic activity and health indicators released on Wednesday for the US were mostly pessimistic, putting pressure on the dollar. ADP Non-Farm Employment data, which is an early estimate of the all-important Non-Farm Payrolls, fell below expectations. ADP employment change dropped to 148K in March from 242K in February, indicating decelerating employment growth. ISM Services PMI dropped to 51,2 in March from 55.1 in February, against expectations of a 54.3 PRINT. The ISM Services index remained just below the threshold of 50, indicating growth in the sector, but at a decelerating pace.
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 are currently split between another 25-basis point rate hike and a complete pause in rate hikes. The Fed has already slowed the pace of rate hikes and may have to discontinue its tightening policy to prioritize financial stability over its fight against inflation.
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 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 was more encouraging, indicating that the process of disinflation is underway. The increase in oil prices this week, 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.
Important labor data are due Thursday for the dollar, including Challenger Job Cuts and Unemployment Claims.
The Euro weakened against the dollar on Wednesday, with EUR/USD dropping to the 1.090 level. If the currency pair goes up, it may encounter resistance near 1.103. If the EUR/USD pair declines, it may find support at 1.078.
Economic activity data released on Wednesday for the Eurozone were mixed overall. German Factory orders rose by 4.8% in February from 0.5% in January, against expectations of a 0.2% growth. EU Final Services PMI dropped to 55.0 in March from 55.6 in February, indicating decreased growth in the Services sector. The indicator remained above the threshold of 50.0 however, which denotes industry expansion.
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 is showing 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 GBP/USD pair traded sideways on Wednesday, fluctuating around the 1.246 level. If the GBP/USD rate goes up, it may encounter resistance near 1.266, while support may be found near 1.227.
UK Final Services PMI data released on Wednesday fell within expectations, with a 52.9 point in March from 52.8 in February, against the 52.8 predicted. The indicator remained above the threshold of 50.0, which denotes industry expansion.
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.
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.
On the data front, several economic activities and health indicators are due on Thursday and may affect the Sterling. These include Halifax HPI, Construction PMI, and Housing Equity Withdrawal.
USD/JPY edged lower on Wednesday, dropping to the 131.2 level. Potential contagion in the banking sector has been driving investors towards safer assets in the past few weeks, boosting the Yen. If the USD/JPY pair declines, it may find support near 130.3. If the pair climbs, it may find resistance at 138.
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 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.
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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