Important calendar events
The dollar exhibited high volatility after the Fed monetary policy meeting on Wednesday. The dollar index plummeted to 105.7, then rose to 106.2, and then dropped again to 105.5. The dollar price will likely continue to fluctuate on Thursday as markets digest the news. US treasury yields declined on Wednesday, with the US 10-year bond yielding approximately 4.63%.
The US Federal Reserve kept interest rates unchanged at its policy meeting on Wednesday, within a target range of 5.25% to 5.50%, as expected. 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. Rate cut expectations shifted again on Wednesday after Fed officials signaled that they would not pivot to a dovish policy until they had more evidence of disinflation.
Odds of a rate cut in July are currently below 10% and odds of a rate cut in August are down to 20% and even of a rate cut in September have dropped to 40%. The first Fed rate cut is not 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, ADP Non-Farm Employment Change data released on Wednesday exceeded expectations, indicating that US employment is expanding. ADP Non-Farm Employment Change reflects change in the number of employed people in the US and April’s print came at 192K versus 179K anticipated.
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. 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 exhibited high volatility after the Fed policy meeting on Wednesday, with the currency pair fluctuating between the 1.065 and the 1.073 level. If the EUR/USD pair declines, it may find support at 1.060, while resistance may be encountered near 1.075.
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 on Tuesday showed 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 2.7% 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 released on Tuesday 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 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 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.
The GBP/USD rate exhibited high volatility on Wednesday. The currency pair was mainly driven by the dollar’s volatility after the Fed policy meeting on Wednesday. GBP/USD dropped to the 1.247 level in early trading on Wednesday then surged to 1.255 as the dollar plummeted. 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 plummeted to the 154.0 level on Wednesday as the dollar weakened. The currency pair surged to 160.0 on Monday, its highest level since May 1990, then dropped sharply to 156.0. Monday’s 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.
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. The Japanese government reportedly intervened to support the Yen on Monday 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 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 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. Ueda then stated on Friday that excessive volatility in forex markets could significantly impact the Japanese economy.
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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