Forex Major Currencies Outlook (Mar 21 – Mar 25)

USD 

Retail sales in February showed that surging gas prices start to impact consumers’ disposable income. Headline number was up 0.3% m/m vs 0.4% m/m as expected. Control group, it includes autos, food and energy and is used for GDP calculation as it has good correlation with overall consumer spending, came in at -1.2% m/m vs 0.4% m/m as expected. There was a big revision to the prior months’ control group reading (6.7% m/m vs 4.8% m/m as preliminary reported), however it may represent a prelude to a negative trend. Ex autos and gas category fell -0.4% m/m as majority of spending went into gasoline. 

Fed chair Powell stayed true to his word given under an oath in his Congress testimony and raised interest rate by 25bp. This is the first rate hike since December of 2018 new range is now 0.25-0.50%. New projections in the Dot Plot showed the median rate at the end of 2022 at 1.9% vs 0.9% in December. This represents seven hikes in 2022! Expectations for 2023 and 2024 are at 2.8% which is above the Fed's long-term neutral rate. The Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting. Additionally, they are ready to adjust the stance of monetary policy as appropriate. St. Louis Fed president Bullard wanted a 50bp rate hike at March meeting stating that "The combination of strong real economic performance and unexpectedly high inflation means that the Committee’s policy rate is currently far too low to prudently manage the U.S. macroeconomic situation". If the tensions between Russia and Ukraine ease we could see a 50bp hike in May. 

Summary of projections sees GDP at 2.8% in 2022 and 2.2% in 2023. The unemployment rate is seen at 3.5% for both 2022 and 2023 while in the longer run it is expected to be 4%. Core PCE inflation is expected to be at 4.1% in 2022, December production saw it at 2.7% and then drop to 2.6% in 2023. Prior to the Fed meeting the yield on 10Y T-note went as high as 2.196% and up to 2.226% post Fed meeting before dropping down below the 2.15% level. The 2-10y yield curve flattened post meeting as the 2y rose faster to reflect new rate hike projections. 

EUR 

Results of the ZEW survey for March were abysmal. Current conditions for the German economy dropped to -21.4 from -8.1 in February while expectations plunged to -39.3 from 54.3 the previous month. Notes accompanying report show that stagflation is expected in the coming months as all sectors of the economy have been impacted. Eurozone final CPI for February came in at 5.9% y/y vs 5.8% y/y as preliminary reported. Both monthly and core readings were unchanged at 0.9% m/m and 2.7% y/y respectively. ECB President Lagarde stated that it is increasingly likely that inflation will stabilise at 2% over the medium-term. Inflating energy prices reflected in Eurozone’s trade balance for January which posted a record deficit of -€27.2bn with energy imports increasing staggering 133% y/y. 

This week we will have preliminary March PMI readings and a deterioration in numbers is expected. 

Important news for EUR: 

Thursday:

• Markit Manufacturing PMI (EU, Germany, France)
• Markit Services PMI (EU, Germany, France)
• Markit Composite PMI (EU, Germany, France) 

GBP 

The employment report added another proof for the tightness of the labour market. The ILO unemployment rate dropped to 3.9% from 4.1% in January while wages, both with bonus and without bonus, showed improvements (4.8% and 3.8% vs 4.6% and 3.8% respectively). Claimant count change dropped by additional 48.1k pulling the claimant count rate with it to 4.4%. 

BOE has delivered a 25bp as was expected, now bringing the rate up to 0.75%. The vote showed much less confidence in a rate hike path than at the previous meeting. It was a 8-1 vote in favour of a 25bp hike with MPC member Cunliffe voting to keep the bank rate at 0.50%. Remember, last time the rate was hiked vote was 5-4 in favour of a rate hike with 4 members voting for a 50bp hike. MPC members stated that "some further modest tightening in monetary policy may be appropriate in the coming months". Markets have interpreted it to mean uncertainty about the path of future rate hikes and GBP dropped about 100 pips after the release. We see additional rate hike in May, to bring the rate up to 1%, after which there will be a pause and reassessment of “developments in the light of incoming data and their implications for medium-term inflation, including the economic implications of recent geopolitical events”. 

This week we will have preliminary March PMI readings as well as inflation and consumption data. 

Important news for GBP: 

Wednesday:

• CPI

Thursday:

• Markit Manufacturing PMI
• Markit Services PMI
• Markit Composite PMI

Friday:

• Retail Sales 

AUD 

RBA meeting minutes from the March meeting saw members reiterate that they will not increase the cash rate until actual inflation is sustainably within the 2-3% target band. Members have acknowledged pick up in inflation, however it is too early to say that it will be sustainably within the target band. They have stated that the war Ukraine is a major new source of uncertainty. February employment report was a stellar success. Employment change came in at 77.4k, more than double of 37k as expected. The unemployment rate fell to 4% from 4.2% in January while participation rate rose to 66.4% from 66.2% the previous month. To top off the report, 121,9k jobs added were full-time jobs while part-time jobs fell by -44.5k. AUDUSD has crossed the 0.73 level on strong jobs report and some banks stared to call for a rate hike at a June meeting despite what RBA stated. We still think that RBA will not move before wage growth goes over 3%, as they stated multiple times.

China is fighting with new covid outbreak and there are lockdowns for the Shenzhen and the entire province of Jilin. The population of Jilin province is roughly 24 million while the city of Shenzen hosts around 18 million people. February data were encouraging. Industrial production came in at 7.5% ytd vs 3.8% ytd as expected, retail sales were up 6.7% ytd vs 3.5% ytd as expected. PBOC members were satisfied with data and decided to leave MLF rate unchanged at 2.85%. Chinese officials made a shift and promised to keep the stock market stable which prompted a rally in the stock market with Hang Seng index jumping 9%.

NZD

Q4 GDP data, a very dated data since we are closing down on Q1 of 2022, came in at 3% q/q and 3.1% y/y. The data showed a healthy rebound from the Q3 that was impacted by covid restrictions. Leading the way were services which expanded by 6.7% with goods-production industries rising by 6.5% while primary industries contracted by 2.2%.

CAD

Inflation continues to run hot in Canada and it confirms that BOC will not take the foot of the gas pedal in regards to the rate hikes. February data show headline inflation rising to 5.7% y/y vs 5.5% y/y as expected and up from 5.1% in January. Headline inflation rose 1% m/m due to surging energy prices followed by rise in food prices and household appliances. All three of the core measures rose with median coming in at 3.5% y/y, common at 2.6% y/y and trimmed at 4.3% y/y. Retail sales is January rose by 3.2% m/m vs 2.4% m/m as expected. The increase was led by higher sales at motor vehicle and parts dealers Sales were up in 9 of 11 sub sectors, representing 85.5% of retail trade.

JPY

BOJ meeting was another snooze fest. Both the rate (-0.10%) and the monetary policy were left unchanged as widely expected. The overall assessment of the economy was downgraded however, economy is likely to recover as impact of virus subsides. They have noted that exports are increasing but that they are stifled by the supply constraints. The bank members highlighted new risks from the Ukraine crisis and how it can have destabilising impact on financial markets as well as sharply pushing up raw material costs. Inflation data for February saw headline number rise to 0.9% y/y on the back of surging energy prices, however “core-core” reading, ex-frsh food and energy came in at abysmal -1% y/y.

CHF

SNB total sight deposits for the week ending March 11 came in at CHF728bn vs CHF725.2bn the previous week. There was a noticeable jump from the previous week as EURCHF hit parity on Monday. After that, the pair is hovering around the 1.02 mark.

This week we will have SNB meeting. No changes to monetary policy or rate are expected.

Important news for CHF:

Thursday:

• SNB Interest Rate Decision

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_{Please note that this analysis should not be used as investing advice as it is only an overview of the economic events influencing the markets. Please remember that our accounts have Market Execution. Please note how Execution works during high impact news and other times of low liquidity.}