Important calendar events
The dollar edged lower on Tuesday ahead of the Fed policy meeting on Wednesday and the dollar index dropped from 103.4 to 103.2. US treasury yields declined, with the US 10-year bond yield falling from 4.31% to 4.29%.
The US Federal Reserve held interest rates steady at its January meeting after delivering three consecutive rate cuts in 2024. FOMC policymakers voted unanimously to maintain the federal funds range to a target range of 4.25% to 4.50%.
The Fed’s latest monetary policy statement did not include an earlier mention that US inflation is moving towards the central bank’s 2% target. Instead, the report stated that price pressures remain elevated, leading to a prolonged pause in rate cuts.
Fed Chair Jerome Powell delivered a mildly hawkish message after the policy meeting, stating that the Fed’s approach will remain data-driven and stressed that the central bank needs to consider potential policy changes under Trump’s administration. Last week, Powell stated that there is no urgent need to cut interest rates, indicating a pause in rate hikes.
Market odds of rate cuts within the year are on the rise, putting pressure on the dollar and US treasury yields. Fed rate cut expectations rose after the release of the US inflation report last week. The Fed, however, is widely expected to keep interest rates steady at this week’s policy meeting on the 19th. Market expectations of rate cuts in 2025 are currently mixed. Markets are pricing in two more rate cuts this year, with the first rate cut in June, while a third rate cut is also considered possible. This week markets will focus on the Fed’s ‘dot plot’, which is a summary of the central bank’s economic projections and reflects the Fed rate outlook.
The Fed entered its blackout period last week ahead of the monetary policy meeting this coming week on the 19th. The blackout period prevents FOMC members from commenting on the central bank’s policy rate ahead of a policy meeting.
On the data front, Industrial Production in the US expanded by 0.7% in February according to data released on Tuesday, after rising by 0.3% in January, beating market expectations of 0.2% growth. Retail Sales on Monday fell short of expectations, raising concerns over the health of the US economy. Retail Sales rose by 0.2% in February after contracting by 1.2% in January but missed market expectations of 0.7% growth. Core Retail Sales, which exclude the sales of automobiles, rose by 0.3% in February, after dropping by 0.6% in January, which was in line with expectations.
Headline inflation in the US rose by 2.8% year-on-year in February after rising by 3.0% in January against expectations of a 2.9% print. Monthly inflation rose by just 0.2% in February, after rising by 0.5% in January against a 0.3% rise anticipated. Core CPI, which excludes food and energy, rose by 0.2% in February, which was significantly lower than January’s reading of 0.4% and fell below expectations of 0.3%. Annual Core CPI rose by 3.1% in February, below the 3.2% estimate down from 3.3% in January.
Preliminary GDP data showed that the US economy expanded by 2.3%, following a 3.1% expansion in the third quarter of 2024 and falling below market estimates of 2.7% growth. In addition, the US economy expanded by 3.0% in the second quarter of 2024 and by 1.4% in the first quarter.
US President Donald Trump has been using threats of imposing trade tariffs as a negotiation tool to further his agenda with other countries. Trump has threatened to impose reciprocal tariffs on many countries, which would raise US import taxes to match those imposed by the country’s other trading partners. Markets this week will continue to focus on Trump’s economic policies and trade tariffs and Trump’s statements are likely to cause volatility in the price of the dollar.
Trump’s tariffs may spark global trade wars and are causing turmoil in markets. Import taxes will raise the price of many products, fueling inflationary pressures. Other nations are likely to reciprocate with tariffs of their own, starting global trade wars, which may lead to economic deterioration and rising inflation in many countries. Trump’s economic policies are raising concerns that the US economic growth will slow down. Many analysts are already expressing concerns that the US will enter a recession.
EUR/USD remained bullish on Tuesday, rising from 1.092 to 1.095. If the EUR/USD pair declines, it may find support at 1.080, while resistance may be encountered near 1.100.
Hopes of political stability in Germany are boosting the Euro. Germany is the Eurozone’s leading economy and an official government has not yet been formed after the German Federal elections in February. It seems likely, however, that Germany’s conservatives led by prospective Chancellor Frederich Merz and the Social Democratic Party will form a coalition. The leaders of the two parties have agreed on a restructure of Germany’s debt that will widen the country’s borrowing limit, and boost defense spending and economic growth. The historic debt reform was finally passed by the German Parliament on Tuesday, boosting the Euro. Germany's Bundestag has finally approved Merz’s plan and has voted to reform the country’s debt.
The ECB lowered its benchmark interest rate by 25 basis points at its latest policy meeting, bringing its main refinancing rate down to 2.65% from 2.90%. In her speech after the policy meeting, ECB President Christine Lagarde reiterated her former statement that the central bank’s policy will remain data-dependent and warned that the ECB will need to stay vigilant in these uncertain times.
On the data front, the German ZEW Economic Sentiment Index rose to 51.6 in March from 26 in February, exceeding market expectations of 48.1, indicating improved economic sentiment in Germany. The Eurozone ZEW Economic Sentiment Index rose to 39.8 in March from 24.2 in February, beating market expectations of a 39.6 print.
Revised GDP data showed that the Eurozone economy expanded by 0.2% in the final quarter of 2024 after expanding by 0.3% in the second quarter, against original estimates of 0.1% growth. The economic outlook of the EU remains fragile as prolonged tightening has brought the Euro area economy to the brink of recession.
EU CPI Flash Estimate data released on Monday showed that Eurozone inflation remains above the ECB’s 2% target and may prevent the ECB from cutting interest rates further. Eurozone inflation rose to 2.4% year-on-year in February after rising by 2.5% in January, exceeding expectations of a 2.3% print. Core CPI, which excludes food and energy, dropped to 2.6% in February from 2.7% in January but also came in higher than the 2.5% reading anticipated.
GBP/USD edged higher on Tuesday, rising from 1.298 to 1.300. If the GBP/USD rate goes up, it may encounter resistance at 1.304, while support may be found near 1.286.
BOE policymakers cut interest rates by 25 basis points in February and the Official Bank Rate was reduced from 4.75% to 4.5%. Seven out of nine MPC members voted in favor of a 25 basis point rate cut, while surprisingly, the other two members were more dovish, voting for a 50bps rate cut.
Bank of England Governor Andrew Bailey has hinted at further rate cuts but has stressed, at the same time, that the BOE will need to decide on its policy on a meeting-by-meeting basis and has refused to commit to a timeline or magnitude of future rate cuts. Markets are currently pricing in over 50 bps of easing by the end of 2025. The BOE currently anticipates that the British economy will grow by 0.75% by the end of 2025 and inflation will rise from 2.5% to 3.7%.
This coming week markets will focus on the BOE monetary policy meeting on the 20th. A rate cut this week is not expected and the BOE is expected to cut interest rates slowly this year. Markets will scrutinize BOE Governor Andrew Bailey’s speech after the meeting for hints on the timing of future rate cuts.
On the data front, the British economy contracted unexpectedly by 0.1% in January after expanding by 0.4% in December, missing expectations of 0.1% growth. Preliminary GDP data for the fourth quarter of 2024 showed that the British economy expanded by 0.1% against estimates of 0.1% contraction and following economic stagnation in the third quarter of 2024.
Price pressures in the UK are rising, reducing the odds of a BOE rate cut in February and putting pressure on the Sterling. Headline inflation in the UK rose by 3.0% annually in January up from 2.5% in December, against expectations of a 2.8% print. Core inflation, which excludes food and energy, rose by 3.7% year-on-year in January from 3.2% in December, which was in line with expectations.
USD/JPY remained steady on Tuesday, fluctuating around the 149.3 level. If the USD/JPY pair declines, it may find support at 146.5. If the pair climbs, it may find resistance at 151.3.
The BOJ raised its interest rate by 25 basis points in January, from 0.25% to 0.50%, its highest level since 2008. In addition, the BOJ adjusted its inflation projections upward, to reflect the depreciation of the yen and rising oil prices, hinting at more rate hikes down the road. Policymakers expect Japan’s inflation to rise to 2.4% in 2025, up from previous estimates of 1.9%, and above the central bank’s 2% target.
BOJ Governor Kazuo Ueda hinted that the central bank will continue to raise interest rates if Japan’s economy continues to improve and the BOJ 2% inflation target is reached. Ueda emphasized, however, that the timeline of future rate hikes will depend on economic and inflationary conditions. Markets currently anticipate that the BOJ will raise interest rates to a peak interest of 1.00% over the next two years.
Markets anticipate that the BOJ will raise interest rates at least one more time this year. The BOJ is expected to raise interest rates by approximately 75 basis points in the next two years, which will bring the central bank’s peak rate to 1.25%.
Market odds of a rate hike at the BOJ policy meeting this week on the 19th, however, are low and the next BOJ rate hike is not priced in before July. Market participants will focus mostly on Ueda’s speech after the meeting to pinpoint the timeline of the next rate hike with more accuracy.
Final GDP data for the final quarter of 2024 showed that the Japanese economy expanded by only 0.6% against expectations of 0.7% growth. Final GDP data for the third quarter of 2024 showed that Japan’s economy expanded by 0.3%, down from 0.7% in the second quarter.
Inflation in Japan is on the rise, raising the odds of future rate hikes and providing support for the Yen. The headline Tokyo CPI inflation rose to 3.4% annually in January from 3.0% in December. National Core inflation in Japan rose by 3.2% year-on-year in January from 3.0% in December against expectations of a 3.1% print. In addition, BOJ Core CPI rose to 2.2% year-on-year in January from 1.9% in December.
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Written by:
Myrsini Giannouli
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