Bank of Canada to hold rates steady
Bank of Canada (BoC) is widely anticipated to maintain its pause this week, leaving interest rates unchanged at a 15-year high of 4.50%. Governor Macklem has emphasized that there’s no need for additional rate hikes if the economy unfolds according to central bank’s projections, which forecast stalling growth for the rest of the year, subsequently cooling inflation. Macklem also stated that an “accumulation of evidence” would be required before considering resuming tightening.
Consequently, it’s unlikely that BoC’s announcement on Wednesday or Macklem’s speech on Thursday will trigger significant volatility in Canadian Dollar. Instead, Loonie is expected to be more reactive to developments in oil prices, as WTI crude remains stuck around 80 mark. Additionally, the currency could be influenced by US CPI data and the release of FOMC minutes when paired against the greenback.
Fed Minutes Showed Recent Banking Turmoil May Result in Lower
The minutes of the March 21-22, 2023, Federal Open Market Committee (FOMC) meeting reaffirmed that price and financial stability are of paramount importance to the Fed.
Regarding the economy, Committee members noted that “recent indicators point to modest growth in spending and output. At the same time, however, participants noted that employment growth has picked up in recent months and is proceeding at a robust pace; the unemployment rate has remained low. Inflation remained elevated.”
Committee members noted that despite a sound and resilient banking system, “recent developments in the banking sector are likely to tighten credit conditions for households and businesses and weigh on economic activity, hiring, and inflation. “Participants noted, however, that the overall effect on economic activity is uncertain at this time.
Constructive Developments for the Consumer
Developments in Australia and the US this week were supportive of our views for the RBA and the FOMC.
The Westpac- MI Consumer Confidence Survey provided a positive update on confidence. The RBA’s decision to leave the policy rate unchanged in April proved to be an important support, with the overall index rising 9.4% this month from 78.5 to 85.8. This is underscored not only by the upswing in the housing subindexes of the survey-mortgage borrower confidence rose 12.2%, the index for the timing of home purchases rose 8.2%, and house price expectations rose 16.7%-but also by the general recovery in households’ expectations for the near-term economic outlook and family finances. While these developments represent a marked improvement over the very pessimistic readings of February and March-a situation comparable only to the major economic dislocations of the 1980s and 1990s-the overall index, at 85.8, must still be considered weak.
US Inflation Expectations Jump, Earnings Season Kicks
Despite the softer-than-expected inflation data released earlier last week, US inflation expectations shocked investors at last Friday’s release; the 1-year expectation jumped from 3.6% to 4.6% due to the surprise surge in energy prices. The expectation was a further easing to 3.5%.
And energy bulls remain in charge of the market, as besides the tighter OPEC supply, the US Energy Secretary Jenifer Granholm said that the US could begin buying oil to refill the strategic reserves and the EIA warned that the global oil demand will rise by 2mbpd to almost 102mbpd. Both helped keeping the price of American crude at around its 200-DMA, a touch below the $83pb level.
Therefore, despite the easing inflation pressures on the CPI figures, the positive pressure building on energy prices and the surging inflation expectations boost the Federal Reserve (Fed) hawks. Combined to waning bank stress, the US 2-year yield – which is a good proxy of what investors think the Fed will do – rose last week, although we are still far below the 5% level before the Silicon Valley Bank (SVB) collapsed. The expectation of a 25bp hike at the next FOMC meeting is given a good 83.5% chance.
EUR/USD April 2022 High Offers Resistance
EUR/USD cleared the February high (1.1033) last week to register a fresh yearly high (1.1076), but lack of momentum to breach the April 2022 high (1.1076) may lead to a near-term pullback in the exchange rate as it snaps the recent series of higher highs and lows.
EUR/USD forecast: April 2022 high offers resistance
EUR/USD is under pressure on the back of US Dollar strength, and it seems as though the Federal Reserve will continue to combat inflation as Governor Christopher Waller insists that ‘monetary policy needs to be tightened further.’
At the same time, Fed Governor Waller warns that ‘monetary policy will need to remain tight for a substantial period of time, and longer than markets anticipate,’ and the comments suggest the Federal Open Market Committee (FOMC) is in no rush to switch gears as inflation remains well above the central bank’s 2% target.
EUR/USD, GBP/USD Hold Near Resistance Ahead of Euro
Both the EUR/USD and GBP/USD pair are holding near key points of resistance with inflation data set to be released from each economy tomorrow morning.
While European inflation has fallen as the ECB has lifted rates with tomorrow expected to show at 6.9% for headline CPI, UK CPI remains stubbornly elevated after last month’s 10.4% print, leading to an expectation for a 9.8% read in tomorrow’s release.
Both the Euro and British Pound remain very near recent highs ahead of tomorrow’s CPI data. Going first is the UK with data to be released at 2:00 AM ET. The expectation is for core inflation to come in at 6.0% and headline inflation to print at a whopping 9.8%. This would still be lower than last month’s 10.4% print but, well beyond where the Bank of England would like it.
In Europe, there’s a bit of hope for even more softening after the preliminary print earlier in the month came in at 6.9% which sets the expectation for the same at tomorrow’s release, scheduled for 5:00 AM ET.
NZ Consumers Price Index
Consumer prices rose 1.2% in the March quarter and are up 6.7% over the past year. The March result was below our forecast, and much lower than the RBNZ’s expectation.
New Zealand consumer prices rose 1.2% in the March quarter, with prices up 6.7% over the past 12 months.
Today’s result was lower than forex market expectations, and well below the RBNZ’s forecast for a 1.8% rise.
Annual inflation remains painfully high. However, inflation looks like it has now peaked.
Core inflation, while still high, is not pushing higher.
Today’s result supports our forecast for just one more OCR hike from the RBNZ in May.
EUR/USD Key Resistance Test
EUR/USD:
EUR/USD continues to struggle with resistance around the 1.1000 level, despite aggressive comments from ECB, which were reiterated in the release of the meeting minutes of the Bank’s latest rate hike.
Headline inflation CPI has continued to fall in both the U.S. and Europe, and this week eurozone inflation CPI fell to 6.9% from last week’s report US CPI of headline inflation of 5.0%. The bigger issue at the moment is core inflation, which has continued to rise in Europe, while it has softened somewhat in the U.S. recently.
The world’s most popular currency pair continues to hold near an important resistance zone with longer-term importance.
I had highlighted this resistance last month when it was about to come back into focus. Within a range of about 100 pips in the EUR/USD pair, extending from about 1.0930 to 1.1033, there are several forms of resistance that form an area of confluence. Three weeks later, this zone has bent but not yet broken through sustainably, and prices are still hovering near the bottom of this zone as of writing.
US Dollar strength weighs on Gold price
Gold is struggling to capitalise on Friday’s modest rise from the $1.970 region and is coming under selling pressure on the first day of the new week. The XAU/USD pair is trading around the $1.977 level during the Asian session, remaining within striking distance of a two-week low reached last Wednesday.
The prospect of further monetary tightening by the U.S. Federal Reserve (Fed) is helping the U.S. dollar to see some buying on Monday, which in turn is seen as the main factor pulling gold prices lower for the second day in a row. Markets now seem convinced that the Fed will continue to raise interest rates to curb high inflation in the U.S. and have fully priced in a 25 basis point hike at the next Federal Open Market Committee (FOMC) meeting in May. Moreover, Fed funds futures suggest a low probability of another rate hike in June.
False expectations from the Federal Reserve are supporting the USD
Bets were boosted by recent hawkish remarks from several Fed officials and incoming positive U.S. macro data, which suggested that the world’s largest economy remains resilient. The flash version of S&P Global’s PMI survey showed Friday that overall U.S. private sector activity expanded at a faster pace in April. Service sector activity grew for the third straight month and at the fastest pace in a year, while the U.S. manufacturing indicator moved into expansion territory for the first time since October 2022.
Caution Prevails Ahead of Big Tech Earnings
Most Asian equities flashed red on Tuesday, pressured by losses in Chinese shares as investors evaluated China’s re-opening story in the face of negative economic and geopolitical forces. European futures are pointing to a mixed open with market players guarded ahead of another event-heavy week for financial markets. Some of the largest companies in the world including the four Big Tech titans (Microsoft, Alphabet, Meta and Amazon) will be reporting their results this week. If the corporate earnings paint an overall encouraging picture, this could boost risk sentiment and support equity bulls. However, a set of disappointing results is likely to enforce renewed pressure on stock markets with the S&P500 and Nasdaq feeling the brunt.
In the currency space, the dollar attempted to stabilize during early trade after slipping in the previous session as more signs of slowing US economic growth cooled Fed hike bets. With markets now pricing in the peak for US interest rates in June, dollar bulls could be running on fumes. Gold drew strength from falling Treasury yields while oil prices steadied after two days of gains.
Dollar bears to hijack the scene?
Repeated signs of cooling price pressures and disappointing US economic data could add more fuel to expectations around the Fed pausing rate hikes and eventually cutting down the road. On Monday, softer US manufacturing data strengthened the argument for the Fed to pause. There are more major releases from the US economy this week including April consumer confidence data, Q1 GDP figures, and most importantly the Fed’s preferred inflation gauge, the Core Personal Consumption Expenditure.
