Important calendar events
The dollar remained steady on Thursday, and the index hovered around 105.3. US treasury yields edged lower, with the US 10-year bond yielding approximately 4.46%.
As expected, the US Federal Reserve kept interest rates unchanged at its policy meeting last week, within a target range of 5.25% to 5.50%. The US Federal Reserve has held interest rates steady since last July. In his speech after the policy meeting Fed chair Jerome Powell stated that, while future rate hikes are unlikely, US inflation has not cooled sufficiently to allow the central bank to proceed with rate cuts.
The FOMC statement released after the conference emphasized that inflationary pressures in the US have eased in the past year, but the progress of disinflation is not as steady as anticipated. The central bank also acknowledged that economic activity in the US is expanding and that the unemployment rate remains low. The Fed’s forward guidance was hawkish, dashing rate cut expectations. In addition, the Fed announced its plans to start tapering its Quantitative Tightening program by which it gradually reduces its balance sheet in June.
For months now, markets have been speculating as to the timeline of the Fed’s pivot to a more dovish policy. Odds of a rate cut in July are currently close to 30% and the odds of a rate cut in September have dropped are approximately 70%. The first Fed rate cut is not fully priced in before November-December. Currently, only 25-50 basis points of rate cuts are priced in within the year. Market expectations of rate cuts are becoming more moderate as policymakers have stated that they intend to start reducing interest rates slowly.
On the data front, Core PCE Price Index, which is the Fed’s preferred inflation gauge, rose by 0.3% in March. On an annual basis, Core PCE rose by 2.7% in March, dropping marginally from February’s 2.8% print but coming above expectations of 2.6%. Core PCE Price Index data showed that US disinflation is progressing, albeit slowly.
US Headline inflation rose by 3.5% year-on-year in March exceeding February’s 3.2% print and rising above expectations of a 3.4% print. Monthly CPI rose by 0.4% in March, against expectations of 0.3% growth. Inflation in the US has proven to be sticky, resisting the Federal Reserve’s efforts to bring it down to its 2% target.
US GDP data for the first quarter of 2024 showed that US economic growth is slowing down. The US economy expanded by only 1.6% in the first quarter of the year, missing expectations of 2.5% and falling considerably below the 3.4% expansion registered in the final quarter of 2023. The US economy is expanding at an increasingly slower pace, as GDP data have shown expansion by 4.9% in the third quarter of 2023.
Increased demand for safe-haven assets due to rising tensions in the Middle East is boosting the dollar. The conflict between Israel and Iran is expected to influence Forex markets in the weeks to come. The crisis between Israel and Iran seems to have been diffused for the time being, although risk aversion sentiment remains high as markets anticipate future developments in the region.
The EUR/USD gained strength on Thursday, rising to the 1.078 level. If the EUR/USD pair declines, it may find support at 1.065, while resistance may be encountered near 1.081.
The ECB left all policy settings unchanged at its latest monetary policy meeting. The European Central Bank kept interest rates unchanged at 4.50% but hinted at a dovish shift in the future. In their statement after the meeting, policymakers stressed that if Euro area inflation remains on a path to achieve the central bank’s 2% target, it would be appropriate to reduce the current level of monetary policy restriction.
The EU central bank has revised its inflation projections down to an average of 2.3% in 2024, 2.0% in 2025 and 1.9% in 2026. In addition, the ECB has revised down its growth projection for 2024 to 0.6%. Expectations of cooling inflationary pressures coupled with increased economic fragility, may induce the central bank to start cutting interest rates sooner than anticipated.
The ECB is expected to start cutting interest rates later this year since inflationary pressures in the Euro area are easing. ECB President Christine Lagarde stated that ECB policymakers wish to see more evidence of inflation dropping to the central bank’s 2% target before cutting interest rates. Lagarde hinted that they expect to have sufficient data in three months, pointing to a rate cut in June. Market odds of a rate cut in June rose after the ECB meeting, while most market analysts forecast around 75 basis points of cuts this year.
The Euro is under pressure by expectations that the ECB will start lowering interest rates by June. The Fed is not likely to start cutting interest rates before July, putting the Euro at a disadvantage against the dollar. In addition, markets are currently pricing in only 50 basis points of Fed rate cuts within 2024, compared to 75 bps of ECB rate cuts.
On the data front, German factory orders dropped unexpectedly in March according to data released on Tuesday. German factory orders shrank by 0.4% in March against projections of 0.4% growth. February’s reading was also revised down to a 0.8% decline.
Euro area inflation remained steady at 2.4% in April. Headline inflation in the EU cooled to 2.4% in March from 2.6% in February. Core CPI, which excludes food and energy, dropped to 2.7% in April from 2.9% in March, beating estimates, however, of a 2.6% print. Easing price pressures in the Eurozone may encourage the ECB to start lowering borrowing costs as early as June.
Preliminary Flash GDP data showed that the Eurozone economy expanded by 0.3% in the first quarter of the year beating estimates of 0.1% growth. GDP data for Q4 of 2023 showed that the Euro area economy was stagnant with a GDP print of zero. The 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 surged to the 1.252 level on Thursday after the BOE kept interest rates steady. If the GBP/USD rate goes up, it may encounter resistance near 1.263, while support may be found near 1.246.
The BOE kept interest rates steady at its monetary policy decision on Thursday. The BOE maintained its official rate at 5.25% at its policy meeting but showed signs of preparing for a dovish pivot.
The BOE’s forward guidance was overall dovish. The voting split of the nine MPC members indicated that the central bank is preparing to abandon its hawkish policy. Seven out of nine members voted for interest rates to stay the same two members voted to lower interest rates compared to one member only at the BOE meeting in March.
Market odds of a rate cut in June rose after the interest rate announcement. Markets are currently giving a high probability of BOE rate cuts starting in August, while a rate cut by September is fully priced in. Rate cut expectations have become more moderate in the past months, with less than 50 basis points of rate cuts expected this year.
The BOE has updated its inflation outlook, predicting that inflation will drop to the BOE’s 2% target in the second quarter of the year. If the BOE’s forecasts are not realized, however, policymakers may be forced to keep interest rates at restrictive levels for longer.
British headline inflation eased to 3.2% year-on-year in March from 3.4% in February, surpassing expectations of a drop to 3.1%, however. Annual Core CPI, which excludes food and energy, fell to 4.2% in March from 4.5% in February, against the 4.1% forecast. Inflationary pressures in the UK remain high and inflation may take a while to drop to the BOE’s 2% target.
The British economy slipped into recession last year, contracting by 0.3% in the final quarter of 2023. Monthly GDP data for February released last week, however, revealed that the British economy has narrowly avoided slipping into recession and has expanded by 0.1%. More importantly, January’s GDP was revised upwards to show an expansion of 0.3%. The British economy is fragile and may force the BOE to pivot to a more dovish policy.
USD/JPY edged higher on Thursday rising to the 155.8 level. The currency pair surged to 160.0 last week, its highest level since May 1990, then dropped sharply to 156.0, raising speculation of a possible intervention. If the USD/JPY pair declines, it may find support near 151.8. If the pair climbs, it may find resistance near a multi-decade high of 160.5.
USD/JPY broke through the 155.0 level again this week, which some analysts consider a line in the sand for an intervention to support the Yen. The Yen’s weakness is causing concern to Japanese officials who have been warning traders against speculative short selling of the Yen. Yen intervention concerns are high, as Japanese authorities have been warning repeatedly that an intervention to support the currency might be imminent.
Japan’s top currency diplomat Masato Kanda stated on Tuesday that the government might have to take action against any speculative foreign exchange moves, reiterating his previous warning. BOJ Governor Kazuo Ueda said on Tuesday that currency moves were among the topics he discussed in a meeting with Prime Minister Fumio Kishida, highlighting the seriousness of the issue for Japanese officials.
Japanese authorities have intervened to support the currency in the past and may do so again if the Yen continues to decline. The Japanese government reportedly intervened to support the Yen last week causing a sudden drop in USD/JPY but the Yen’s rally was short-lived. Concerns about an imminent intervention have been keeping Yen short sellers in check, providing some support for the currency.
The BOJ kept all policy settings unchanged at its latest policy meeting, despite the Yen’s recent weakness. The BOJ had pivoted to a more hawkish policy at its previous meeting in March, ending its negative interest rate policy and raising the benchmark interest rate into the 0% - 0.1% range. The Yen continues to weaken as there is still a significant disparity between interest rates offered by the BOJ and those from other major central banks.
BOJ Governor Kazuo Ueda did not deliver clear forward guidance at his press conference after the meeting. Ueda’s comments after the BOJ meeting pushed the Yen further down to fresh 34-year lows, reminding of an event in 2022 when dovish BOJ commentary had caused the Yen to plummet forcing the central bank to stage an intervention to support the currency.
On the data front, inflation in Japan remains low but is slowly rising. Headline inflation dropped to 2.6% year-on-year in March from 2.8% in February against expectations of a 2.7% print.
Final GDP data for the final quarter of 2023 showed that Japan's economy expanded by 0.1% against expectations of 0.3% expansion. The Japanese economy contracted by 0.7% in the third quarter and expanded by 1.2% in the second quarter of 2023, showing that the country’s economy is shrinking. Recession concerns limit the odds of a BOJ hawkish pivot in the coming months.
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Written by:
Myrsini Giannouli
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