Important calendar events
The dollar plummeted on Wednesday, with the dollar index dropping below 103.3. US treasury yields also declined, with the US 10-year bond yielding approximately 4.10%.
The US Federal Reserve kept interest rates unchanged at its meeting in January, within a target range of 5.25% to 5.50%. The Fed has removed the tightening bias from its policy statement, indicating that the central bank is preparing to pivot to a less restrictive monetary policy. Fed Chair Jerome Powell, however, has discounted the possibility of a rate cut in March.
Fed Chair Jerome Powell delivered his Semi-annual Monetary Policy Report to the US Congress and the House Financial Services Committee. Powell’s address to the Senate was on the hawkish side, reiterating that the central bank is not ready to start reducing interest rates. Powell’s testimony, however, did not hold any surprises, and rate cut expectations have already been dialed back considerably and the dollar dipped further after Powell’s speech.
On Thursday, Powell will continue his testimony in a question-and-answer session before the US Senate Banking Committee. Powell’s speeches this week are expected to attract the attention of market participants, as they may provide insight into the Fed’s policy outlook.
Fed officials wish to see more evidence of disinflation before moving ahead with cutting interest rates. Rate cut expectations have been fluctuating strongly in the past couple of weeks. Odds of a rate cut in March are practically nil. Rate cut odds in May are also down to 20% from over 80% a few weeks ago. In addition, only 25 basis points of rate cuts are priced in by May, against 25-50 bp before. Market expectations of rate cuts are becoming more moderate as policymakers have stated that they intend to start reducing interest rates slowly.
ADP Non-Farm Employment data released on Wednesday showed that the number of employed people rose by 140K in February, up from 110K in January, but missing expectations of 149K. JOLTS Job Openings data showed that the US economy added 8.86M new jobs in January, which was in line with expectations.
US ISM Services PMI data released on Tuesday were disappointing, putting pressure on the dollar. The ISM Services PMI index dropped to 52.6 in February from 53.4 in January against expectations of a 53.0 print. The US Services sector continues to expand, as indicated by a print above 50, however, the rate of expansion was reduced in February. US Factory orders also fell below expectations. Factory orders declined by 3.6% in January from a 0.3% drop in December, against expectations of a 3.1% contraction.
Core PCE Price Index, which is the Fed’s preferred inflation gauge, rose by 0.4% in January compared to December’s 0.2% growth. On an annual basis, Core PCE was at 2.8% in January, down from 2.9% in December. Core PCE Price Index data showed that US disinflation is progressing, albeit slowly.
Preliminary US GDP data showed that the US economy remains robust and expanded by 3.2% in the final quarter of 2023, missing, however, market forecasts of 3.3%. The US economy is expanding at a slower pace, as final GDP data have shown expansion by 4.9% in the third quarter of 2023, but economic growth in Q4 of 2023 exceeded expectations.
US Headline inflation rose by 3.1% year-on-year in January from a 3.4% print in December against expectations of a much lower reading of 2.9%. Monthly CPI rose by 0.3% in January, exceeding expectations of a 0.2% print. Core CPI, which excludes food and energy, rose by 0.4%, its higher monthly growth since June, against expectations of a 0.3% raise.
Markets were anticipating a sharp drop in inflation in January, which was not realized, dashing expectations of early Fed rate cuts, and boosting the dollar. The progress of disinflation in the US is not steady, limiting the odds of a Fed rate cut before June.
The Euro gained strength against the dollar this week ahead of the ECB policy meeting on Thursday and EUR/USD touched the 1.091 level on Wednesday. If the EUR/USD pair declines, it may find support at 1.079, while resistance may be encountered near 1.093.
The ECB kept interest rates unchanged at 4.50% at its January meeting. ECB President Christine Lagarde has stated that interest rates are currently at sufficiently high levels to bring inflation down to the central bank’s 2% target over time. Lagarde has also reiterated that ECB interest rates will remain at sufficiently restrictive levels for as long as necessary. The ECB is expected to pivot to a more dovish policy later this year, but the timeline is still uncertain.
This week the spotlight is going to be on the ECB monetary policy decision on Thursday. Markets are expecting the central bank to keep its Main Refinancing Rate steady at 4.50% this month. Market analysts stipulate that the central bank is likely to lower its outlook for inflation on Thursday, as a precursor to lowering interest rates later this year.
Most market analysts, however, do not anticipate rate cuts before June and forecast around 90 basis points of cuts this year. This week, traders will focus on the ECB’s forward guidance. Lagarde’s Press Conference after the policy meeting will attract market attention and it may provide important insight on the ECB’s direction in the coming months.
On the data front, Eurozone Services PMI data on Tuesday showed that the EU Services sector is starting to recover. Final Services PMI rose to 50.2 in February from 50.0 in January, against expectations of a steady print of 50. The Services sector is growing, with a print above 50 that denotes sector expansion. Services PMI data for the Eurozone’s leading economies also exceeded expectations, boosting the Euro ahead of Thursday’s monetary policy decision.
Headline inflation in the EU dropped to 2.6% year-on-year in February from 2.8% in January. Euro area inflation, however, missed expectations of a greater drop to 2.5% in February. Core inflation, which excludes food and energy, has dropped to its lowest level in two years. Core inflation cooled to 3.1% in February from 3.3% in January, but also disappointed expectations of a drop to 2.9%.
Flash GDP data for Q4 of 2023 showed that the Euro area economy was stagnant with a GDP print of zero, as anticipated. The Eurozone economy does not show sufficient signs of recovery and is on the brink of recession. EU economy contracted by 0.1% in the third quarter of 2023 and barely expanded in the second quarter by 0.1%, after contracting by 0.1% in Q1.
GBP/USD gained strength on Wednesday, touching 1.276. If the GBP/USD rate goes up, it may encounter resistance near 1.277, while support may be found near 1.259.
Britain's Spring budget was announced on Wednesday boosting the Sterling. British Finance Minister Jeremy Hunt is tasked with striking a balance between boosting economic growth and managing high inflation. Hunt announced on Wednesday that he will cut the rate of social security contributions by 2%. Hunt was hoping to announce tax cuts to the British public to boost the appeal of the Torry party ahead of the General Elections at the beginning of next year. Budget constraints, however, have left the British Finance Minister little room to maneuver with.
UK Services PMI data released on Tuesday missed expectations, putting pressure on the Sterling. British Services PMI dropped to 53.8 in February from 54.3 in January against expectations of a steady print of 54.3. The Services sector in the UK continues to expand as evidenced by a print above the threshold of 50. The rate of expansion, however, is slowing down.
The BOE maintained its official rate at 5.25% at its latest meeting, as expected. In addition, the BOE updated its inflation outlook, predicting that inflation will drop to the BOE’s 2% target in the second quarter of the year. This reinforced the notion that the central bank is preparing to cut interest rates. BOE Governor Andrew Bailey has stressed that inflationary pressures are cooling and that further rate hikes are unnecessary.
Market expectations of BOE rate cuts are putting pressure on Sterling. Markets had been pricing in aggressive rate cuts of over 100 basis points this year. In the past couple of weeks, however, rate cut expectations have become more moderate, dropping to 70bp.
The British economy remains fragile and may force the BOE to pivot to a more dovish policy. Recent GDP data showed that the country has slipped into recession. Monthly GDP contracted by 0.1% in December, from a 0.2% growth in November. Preliminary quarterly GDP data revealed that the British economy contracted by 0.3% in the final quarter of 2023, against expectations of 0.1% contraction and 0.1% contraction in the third quarter of 2023. The British economy expanded by 0.3% in the first quarter of the year and 0.2% in the second quarter.
British headline inflation remained steady at 4.0% year-on-year in January, against expectations of a 4.1% print. Annual Core CPI, which excludes food and energy, grew at the same pace of 5.1% as December and November, against the 5.1% forecast. British inflation is expected to fall towards the BOE’s 2% goal in the coming months, relieving some of the pressure on the central bank to keep high-interest rates.
USD/JPY continued to decline on Wednesday, dropping to the 149.2 level. If the USD/JPY pair declines, it may find support near 148.9. If the pair climbs, it may find resistance near 150.8.
The BOJ kept all policy levers unchanged at its January meeting, maintaining its ultra-easy monetary policy. The BOJ has been keeping interest rates at a negative level, putting pressure on the Yen. The BOJ has so far maintained its dovish bias as other major central banks, and especially the Fed, have raised interest rates to high levels. BOJ Governor Kazuo Ueda has hinted at a policy shift down the road but has remained non-committal as to the timeline of a potential rate hike.
An immediate policy shift is not expected yet, but markets are pricing in the first BOJ rate hike in June with a lower probability of a rate hike in April. Only a small rate hike of 10bps is considered likely, which would bring the BOJ’s interest level from negative to zero. On Wednesday, however, reports that some BOJ members would speak in favor of a rate hike at the next policy meeting in March, raised rate hike expectations, boosting the Yen.
Inflation in Japan remains low but is slowly rising. Tokyo Core CPI rose by 2.5% year-on-year in February from 1.6% in January, according to data released on Tuesday. BOJ Core CPI remained at 2.6% year-on-year in January against expectations of 2.3% print. In addition, headline inflation rose by just 2.0% year-on-year in January from 2.3% in December.
Japan’s Deputy Chief Cabinet Secretary Hideki Murai stated on Tuesday that inflation in Japan is gradually rising, boosting expectations of a rate hike later in the year.
Ueda warned last week that the goal of achieving the bank's 2% inflation target sustainably is not yet in sight. Ueda’s dovish remarks reinforced the notion that the BOJ is not yet ready to raise interest rates, putting pressure on the Yen.
The Yen has retreated to its lowest level in three months, causing alarm among Japanese government officials. The BOJ has intervened at least twice in 2022 to support the Yen by selling dollars and buying Yen to support the country’s currency. Japanese officials have been issuing warnings against opportunistic short sellers of the Yen, hinting at another intervention to support the currency.
Preliminary GDP data for the final quarter of the year showed that Japan's economy contracted by 0.1% against expectations of expansion by 0.2% and 0.7% contraction in the third quarter. The Japanese economy expanded by 1.2% in the second quarter of 2023, showing that the country’s economy is shrinking. Recession concerns and cooling inflation shrink the odds of a BOJ hawkish pivot in the coming months.
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Written by:
Myrsini Giannouli
présence dans l'industrie en tant que fournisseur de liquidités
et une exécution fiable
séparés
de premier ordre
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