Important calendar events
The dollar dipped on Monday and the index dropped to 105.6. US treasury yields also declined, with the US 10-year bond yielding approximately 4.62% at the end of the week.
This coming week's main event is the Fed monetary policy decision on May 1st. The US Federal Reserve kept interest rates unchanged at its policy meeting in March, within a target range of 5.25% to 5.50%. The US Federal Reserve has held interest rates steady since last July. We expect interest rates to remain steady this week and traders will focus on Fed chair Jerome Powell’s forward guidance.
The Fed is under a lot of pressure right now, however. On one hand, economic growth in the US is decelerating. The US economy needs extra stimulus and that means that interest rates need to go down. On the other hand, though, price pressures remain high, preventing the Fed from cutting interest rates.
For months now, markets have been speculating as to the timeline of the Fed’s pivot to a more dovish policy. A rate cut is not priced in before July and even then, the odds of a July rate cut are down to 40%. The first Fed rate cut is not fully priced in before August. More importantly, only 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. Diminishing rate cut expectations are boosting US treasury yields, providing support for the dollar.
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 economic calendar is full this week with major releases that are likely to affect the dollar. On top of the Fed rate decision on Wednesday, we have strong data due throughout the week. ADP Non-Farm Employment Change data are due on Wednesday, as well as US Manufacturing PMI data. US Unemployment Claims are due on Thursday and on Friday the monthly US Jobs Report and especially Non-Farm Payrolls (NFPs).
The EUR/USD pair retained its upward trajectory on Monday with the currency pair trading close to the 1.072 level. If the EUR/USD pair declines, it may find support at 1.060, while resistance may be encountered near 1.075.
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 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.
German Preliminary CPI data released on Monday fell below expectations. German Preliminary CPI rose by only 0.5% in April against expectations of a 0.6% print. EU Flash inflation data are due on Tuesday and are expected to show that 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 2.9% from 3.1% the previous month. Easing price pressures in the Eurozone may encourage the ECB to start lowering borrowing costs as early as June.
Preliminary Flash GDP data for the first quarter of 2024 are due on Tuesday for the Euro area. This week’s GDP data are expected to show that the Eurozone economy expanded marginally by 0.1% in the first quarter of the year. GDP data for Q4 of 2023 showed that the Euro area economy was stagnant with a GDP print of zero. The Eurozone economy does not show sufficient signs of recovery and is on the brink of recession. 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.
The GBP/USD currency pair traded upward on Monday, touching the 1.256 level. If the GBP/USD rate goes up, it may encounter resistance near 1.270, while support may be found near 1.229.
The BOE maintained its official rate at 5.25% at its policy meeting in March but showed signs of preparing for a dovish pivot. BOE Governor Andrew Bailey’s statement after the meeting had dovish undertones, stating that cooling inflationary pressures in the UK support potential interest rate cuts and hinting at two or three rate cuts within the year.
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 BOE recently 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.
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 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 skyrocketed to 160.0 in early trading on Monday, its highest level since May 1990 then dropped sharply to 156.0. The sharp drop in the currency pair raised intervention speculation, although rumors of an intervention to support the Yen have not been confirmed. If the USD/JPY pair declines, it may find support near 153.6. If the pair climbs, it may find resistance near a multi-decade high of 160.5.
The BOJ kept all policy settings unchanged at its policy meeting last week, 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 last week’s meeting. Ueda underplayed the Yen’s weakness stating that the impact of the weak yen on underlying inflation is “not big”.
Ueda’s comments on Thursday pushed the Yen further down to fresh 34-year lows, reminding of the 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. Ueda then stated on Friday that excessive volatility in forex markets could significantly impact the Japanese economy.
Yen intervention concerns are high, as Japanese authorities have been warning repeatedly that an intervention to support the currency might be imminent. The Yen’s weakness is causing concern to Japanese officials who have been warning traders against speculative short selling of the Yen.
Japanese authorities have intervened to support the currency in the past and may do so again if the Yen continues to decline. Concerns about an imminent intervention have been keeping Yen short sellers in check, providing some support for 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
presença na indústria como Provedor de Liquidez
e execução confiável
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suporte ao cliente
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