Forex News

The Fed’s preferred inflation gauge, the Core Personal Consumption Expenditure (Core PCE), will be released by the US Bureau of Economic Analysis on Friday, March 31 at 12:30 GMT and as we get closer to the release time, here are the forecasts of economists and researchers of seven major banks.

Core PCE is expected to stay at 4.7% year-on-year while rising 0.4% in February (MoM). The headline is seen increasing by 0.2% in February, and a slowdown in the annual rate from 5.4% to 5.3%. 

Deutsche Bank

“We see a +0.36% advance for the core PCE in February and MoM declines for both income (-0.1% vs +0.6% in January) and consumption (-0.6% vs +1.8%).”

CIBC

“The Fed’s preferred gauge of inflation, core PCE prices, likely decelerated to a 0.4% monthly pace, slightly slower than its CPI counterpart given the lower weight of shelter in the index, but still too hot to reach on-target inflation, and justifying the Fed’s decision to raise rates further in March. We are roughly in line with the consensus, which should limit any market reaction.”

Citi

“Core PCE inflation should rise 0.31% MoM in February based on details of CPI and PPI, a softer increase than in January but with core PCE YoY moderating only slightly to 4.6% and with risks of a print that remains at 4.7%. Some strong details of CPI will still be supportive of PCE inflation, including persistently strong shelter prices. Meanwhile, we continue to pencil in modestly stronger core PCE prints than CPI for much of this year due to the strength in key non-shelter services prices.”  

TDS

“We expect core PCE price inflation to slow down from a robust 0.6% MoM in Jan to a still-strong 0.4% in Feb (also below core CPI's 0.5% MoM gain). The YoY rate likely rose a tenth to 4.8%, suggesting the path to normalization in price gains will be bumpy. Conversely, personal spending likely fell, but that would follow an eye-popping 1.8% surge in the prior month.”

NBF

“The annual core PCE deflator may have stayed unchanged at 4.7%.”

Wells Fargo

“We forecast the PCE deflator (+0.4%) to outpace nominal spending (+0.3%).”

Credit Suisse

“We expect the monthly reading to just round down to 0.3%, leaving YoY core inflation unchanged at 4.7%. Monthly headline inflation should be similar to core, but the YoY measure should drop to 5.1% owing to an easy base effect.”

Nasdaq 100 strength has extended. However, economists at Credit Suisse expect the index to move back lower from the 12856/81 resistance zone.

Weekly close above 12856/81 would suggest a more meaningful move higher can emerge

“We continue to look for the key resistance from the 38.2% retracement of the 2021/22 fall and YTD high at 12856/81 to cap to define the top of a broad range.” 

“Near-term support moves to 12407, below which can add weight to our view for a fall back to the key 63 and 200-DMA cluster at 11963/05. Below 11695 is needed to warn of a falll back to the ‘neckline’ to the small base from the beginning of the year at 11093.”

“A weekly close above 12856/81 would instead suggest a more meaningful move higher can emerge for resistance next at the 50% retracement and summer 2022 high at 13603/721.”

• US Dollar struggles to find demand as risk flows dominate the financial markets.
• EUR/USD bullish bias stays intact in the near term.
• PCE inflation data from the US could trigger the next big action in the US Dollar.

The US Dollar (USD) started the new week under bearish pressure as easing fears over a global financial crisis allowed investors to move toward risk-sensitive assets. After having closed the previous two weeks in negative territory, the US Dollar Index continued to push lower and broke below 103.00. Renewed expectations about the US Federal Reserve (Fed) pausing its tightening cycle at the upcoming meeting also put additional weight on the USD shoulders. On Friday, the US Bureau of Economic Analysis will publish the Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred gauge of inflation. PCE inflation figures could significantly impact the USD performance against its major rivals.

Daily digest market movers: US Dollar remains vulnerable

• FDIC issued a statement over the weekend announcing that First Citizens BancShares Inc bought all the loans and deposits of SVB. 
• Brazil and China have reportedly reached an agreement to ditch the US Dollar as an intermediary in trade transactions.  
• The US Bureau of Economic Analysis announced on Thursday that it revised the annualized Gross Domestic Product (GDP) growth for the fourth quarter to 2.6% from 2.7% in the previous estimate.
• The US Department of Labor's weekly data revealed that Initial Jobless Claims rose by 7,000 to 198,000 in the week ending March 25. 
• While speaking on Monday, Federal Reserve Governor Philip Jefferson refrained from sharing his view about whether the Fed should continue raising interest rates.
• The Conference Board’s monthly data showed on Tuesday that the Consumer Confidence Index rose modestly in March while the one-year inflation expectation component edged slightly higher to 6.3%. 
• Previewing the upcoming PCE inflation data, “if the Core PCE remained elevated in February, it would be bad news for the Fed. FOMC members would be in a complex spot battling inflation (with higher interest rates) while facing a crisis in the banking,” said FXStreet Analyst Matias Salord. 
• The benchmark 10-year US Treasury bond yield rose above 3.5% at the beginning of the week but struggled to extend its rebound.
• China's Taiwan Affairs Office threatened retaliation over Taiwan President Tsai Ing-wen's visit to the US on Wednesday.
• FOMC Chairman Jerome Powell reportedly told the Republican Study Committee on Wednesday that they intend to raise the policy rate one more time before the end of the year.
• Wall Street’s main indexes opened decisively higher on Thursday after having registered strong gains on Wednesday. 
• CME Group FedWatch Tool shows that markets are pricing in a nearly 53% possibility that the Fed will leave its policy rate unchanged in May.
• Inflation in Germany, as measured by the Consumer Price Index (CPI), declined to 7.4% on a yearly basis from 8.7% in February but came in above the market expectation of 7.3%. 

Technical analysis: US Dollar is likely to remain weak against Euro

EUR/USD bullish bias stays intact in the near term with the Relative Strength Index (RSI) indicator on the daily chart holding near 60. This technical reading also suggests that the pair has more room on the upside before turning overbought. Additionally, the pair continues to trade above the 20-day and the 50-day Simple Moving Averages after having tested them toward the end of the previous week. 

1.0900 (psychological level, static level) aligns as key technical level for EUR/USD. If the pair manages to stabilize above that level, it could target 1.1000 (end-point of the latest uptrend) and 1.1035 (multi-month high set in early February).

On the downside, 1.0800 (psychological level) could be seen as interim support ahead of 1.0730 (50-day SMA, 20-day SMA) and 1.0650/60, where the 100-day SMA and the Fibonacci 23.6% retracement of the latest uptrend is located. A daily close below the latter could be seen as a significant bearish development and open the door for an extended slide toward 1.0500 (psychological level) and 1.0460 (Fibonacci 38.2% retracement).

How is US Dollar correlated with US stock markets?

Stock markets in the US are likely to turn bearish if the Federal Reserve goes into a tightening cycle to battle rising inflation. Higher interest rates will ramp up the cost of borrowing and weigh on business investment. In that scenario, investors are likely to refrain from taking on high-risk, high-return positions. As a result of risk aversion and tight monetary policy, the US Dollar Index (DXY) should rise while the broad S&P 500 Index declines, revealing an inverse correlation. 

During times of monetary loosening via lower interest rates and quantitative easing to ramp up economic activity, investors are likely to bet on assets that are expected to deliver higher returns, such as shares of technology companies. The Nasdaq Composite is a technology-heavy index and it is expected to outperform other major equity indexes in such a period. On the other hand, the US Dollar Index should turn bearish due to the rising money supply and the weakening safe-haven demand.
 

Economists at ING think the Mexican Peso’s bullish momentum may have further to run.

25 bps hike by Banxico, and maybe a break below 18.00

“Today, Banxico will announce monetary policy and we expect a 25 bps rate hike to 11.25%. “Market pricing suggests investors have already scaled back expectations for additional Banxico tightening beyond today’s hike. If anything, leaving the door open for more tightening if needed as the Bank reiterates its resolution to fight inflation might see some positive impact on the MXN.”

“We think MXN remains attractive in an environment where markets favour currencies with high carry and positive exposure to rebounding crude prices.”

“A break below 18.00 in USD/MXN may be on the cards soon, potentially today on a hawkish surprise by Banxico.”

Year-to-date, the US Dollar has been whipsawing from positive to negative on the back of multi-sigma moves in the rates markets. Economists at ANZ Bank expect the US Dollar Index (DXY) to plummet toward 98 by the end of the year.

US growth to slow

“We expect a slowdown in US growth on the back of recent events which reinforce our view of a weaker Dollar this year.”

“A steeper yield curve tends to correlate with a weaker Dollar, especially as interest rate cuts are now being priced in.”

“Our year-end forecast for the US Dollar Index is 98.”

US Treasury Secretary Janet Yellen will tell at National Business Economics Association on Thursday that recent development in the banking industry remains them the “urgent need” to complete unfinished post-crisis reforms. “The US banking system is sound”:

In prepared remarks, she called Congress to raise or suspend the debt limit and also spoke about stable-coin.

Key quotes from the speech:

"Financial stability is a public good. Government plays a fundamental role in the provision of financial stability, as the costs of systemic failure are externalized to the broader society."

“During the COVID pandemic and again this month, the proverbial fire department had to be called – in the form of interventions by the Fed, FDIC, and Treasury. These events remind us of the urgent need to complete unfinished business: to finalize post-crisis reforms, consider whether deregulation may have gone too far, and repair the cracks in the regulatory perimeter that the recent shocks have revealed.”

“Today, the U.S. banking system is sound, even as it has come under pressure. The new Fed facility and discount window lending are working as intended to help banks meet the needs of all of their depositors. The capital and liquidity positions of the overall system remain at strong levels.”

“Let me be clear: this month’s developments have been very different than those of the Global Financial Crisis. Back then, many financial institutions came under stress due to their holdings of subprime assets. We do not see that situation in the banking system today.”

“The strong actions we have taken ensure that Americans’ deposits are safe. And we would be prepared to take additional actions if warranted.”

“It's also important that we reexamine whether our current supervisory and regulatory regimes are adequate for the risks that banks face today. We must act to address these risks if necessary.”

“We’ve been focused on mitigating systemic risks from the use of leverage at hedge funds and similar funds. Hedge fund gross assets in 2021 reached almost $10 trillion, up more than 50 percent since 2016. Hedge funds playing bigger role in U.S. Treasury market.”

“Recommended that Congress enact legislation to establish a comprehensive prudential regulatory framework for stablecoin issuers. Such a framework would include consolidated federal supervision, requirements for how a coin could be backed, capital and liquidity requirements, and restrictions on affiliation with commercial companies.”

“We have existing consumer and investor protection standards in traditional financial markets. These same principles and protections should apply in markets for crypto-assets.”

“This catastrophe is preventable. Congress must raise or suspend the debt limit. It should do so without conditions – and without waiting until the last minute.”

• GBP/USD gathers fresh upside traction and approaches 1.2400.
• The greenback accelerates losses and trades closer to 102.00.
• US final Q4 GDP Growth Rate disappointed estimates.

Further losses in the greenback allow GBP/USD to pick up extra pace and reach the 1.2380 region, or multi-week highs, on Thursday.

GBP/USD stronger on USD-selling

GBP/USD sees its upside pressure intensify on the back of the persistent selling pressure in the greenback and the solid improvement in the risk complex on Thursday. The marked knee-jerk in the dollar came in response to higher-than-expected inflation figures in Germany, which could reinforce the case for further tightening by the ECB as soon as at the May gathering.

In the meantime, price action around the British pound appears underpinned by the better tone among its risk-linked peers, while the continuation of the hiking cycle by the BoE should offer some extra support to the quid despite the "Old Lady" could be approaching its peak on rates.

There were no data releases across the Channel on Thursday, while US GDP Growth Rate expanded below consensus 2.6% YoY in Q4 and Initial Jobless Claims rose by 198K in the week to March 25.

GBP/USD levels to consider

As of writing, the pair is gaining 0.40% at 1.2361 and the breakout of 1.2380 (monthly high March 30) would open the door to 1.2447 (2023 high January 23) and then 1.2666 (monthly high May 27 2022). On the other hand, the next support emerges at 1.2160 (55-day SMA) followed by 1.2010 (weekly low March 15 and finally 1.1892 (200-day SMA).

CAD extends gains to a one-month high on the USD. Shaun Osborne, Chief FX Strategist at Scotiabank, expects the USD/CAD pair to plummet toward 1.33/34 on a sustained break under the 1.35 zone.

Backdrop looks CAD positive

“At month-end, there is a risk that CAD gains are related to short-term flows. However, if you combine (relatively extended CAD-bearish) positioning, valuation considerations, CAD-positive seasonals, some (developing) technical momentum and throw in the narrowest WCS/WTI spread in nearly a year and the idea of CAD gains having some sticking power is not so far-fetched. A positive risk backdrop adds to the bullish backdrop for the CAD too.”

“Technical damage has already been done to the USD by spot’s weakness under the 40-Day Moving Average (1.3584) I believe but a clear push under the 1.35 area would solidify prospects for additional CAD gains in the coming weeks towards 1.33/1.34. “

• Gold price catches a bid after US data shows worsening jobless claims and decline in US GDP.
• Jerome Powell said privately the Federal Reserve expects one more rate hike this year but markets disagree.
• US Dollar suffers negative outlook versus major peers as Fed handcuffed by banking crisis – XAU/USD positive.

Gold price breaks out of its narrow range and enters $1,970s after US data supports a more positive outlook for the precious metal, on Thursday. Higher-than-expected Initial Jobless Claims and lower-than-forecast Gross Domestic Product suggest the US Federal Reserve may pause their rate-hiking agenda. Despite Fed Chairman Jerome Powell admiting privately that the Fed still sees one more rate hike this year, a market-based gauge of future rate hikes shows the odds favoring the Fed doing nothing. 

Lacklustre US data increases probability of Fed pausing rate hikes

Initial Jobless Claims for the week ending March 24 showed an unexpected rise to 198K on Thursday, well above the 196K forecast and the 191K previous. The data suggests the labour market may be weakening and could encourage the Fed to pause and not hike rates at their next meeting. In fact, after the release of the data, the probabilities of a rate hike as measured by Fed Funds Futures Curve rose a percentage point to 56% with chances of a 0.25% hike falling slightly to 44%. 

Gross Domestic Product Annualized (Q4) came out at 2.6% when it was expected to remain unchanged at 2.7%, indicating lower-than-expected growth. This will have further weighed on expectations that the Fed will continue raising rates to combat higher prices. The data is causing a sell-off in the Dollar, with the US Dollar Index (DXY) down 0.15% since the release, and this is supporting XAU/USD's rebound.

On Friday March 31 another important data release for XAU/USD, the Fed's prefered gauge of inflation, the US Core Personal Expenditures – Price Index (PCE) for February, is scheduled for release at 12:30 GMT. Economists expect the key Core PCE to decline to 0.4% from 0.6% previously, MoM, and to remain unchanged at 4.7% YoY. A substantially higher-than-expected result could prompt the Fed to raise rates more aggressively negatively impacting XAU/USD, and vice-versa for a lower-than-expected result. 

Powell privately believes in one more hike but markets pass-on-by

Republican Representative Kevin Hern reported to Bloomberg that Jerome Powell admitted he still sees one more rate hike, when he was in a private meeting with US lawmakers on how much further the central bank will raise interest rates this year.

Despite the revelation, the Fed Funds Futures Curve is still pricing in a higher chance of the Fed not hiking in May and the Fed cutting rates more than once in 2023.

Lower rates are generally positive for XAU/USD as they increase the opportunity cost of holding Gold vis-a-vis staying in cash or cash alternatives. The opposite is the case for higher rates.

Fundamentals undermine US Dollar outlook, support Gold price

Longer term, the outlook for the US Dollar suffers from a negative perception compared to its main counterparts, especially the Euro. This could result in losses for the US Dollar Index (DXY) which tracks the value of the currency against a weighted basket of counterparts. Such a weakening of the buck would be a bullish catalyst for XAU/USD.

In the case of the Euro, the US Dollar may decline due to a possible closing of the interest rate differential between the currencies, which hitherto has favored the Greenback. Currencies with higher rates gain an advantage via the effect of the carry trade in which investors profit by borrowing currencies in a low interest rate jurisdiction and using the money to buy a currency yielding a higher rate of return. 

The gap is likely to close because the Federal Reserve (Fed) is widely seen as reaching the end of its hiking cycle, whilst the European Central Bank (ECB) is still viewed as being at the start of its cycle. 

The Fed is also seen as more limited in how much higher it can raise rates compared to the ECB due to the different effects higher rates have on the two region’s banking systems. 

According to Andrew Stimpson, KBW Head of European Banks Research, Europeans are much less likely to withdraw their bank deposits and invest them in higher yielding money market funds – the root cause of the US banking crisis.  

“In Europe we haven’t got the same ease to switch into a money market fund, that is not a normal product that the general population will think of,” said Stimpson in an interview with Bloomberg News.

“The absolute level of rates in Europe is also lower than in the US, so if you are going to sit down on a Sunday afternoon and sort out your finances, whether you are going to switch from an overnight rate of zero to a timed deposit of 1.6-1.7% it is probably not going to make much  difference to you,” Stimpson added.

Other major currencies, including the Pound Sterling and the Yen may also strengthen versus the US Dollar. UK Core CPI recently rose to a relatively high 6.2% in February suggesting there will be more pressure on the Bank of England (BOE) to hike rates, with the effect of boosting the Pound.

In Japan, meanwhile, a monetary policy pivot is widely expected after the inauguration of a new governor for the Bank of Japan Ueda Kazuo and on the back of rising inflation. If the BOJ tightens policy after years of ultra-loose policy it could have a dramatic effect on the Yen. Japanese investors have bought an estimated $3.4 trillion of foriegn assets during decades of extremely low interest rates in Japan, seeking yield overseas due to a dearth of options at home. This outflow of capital threatens to tsunami back to Japan if the BOJ begins to raise rates there, substantially increasing demand for the Yen, according to a recent report by Bloomberg News. 

Gold price bullish trend despite lack of direction in short term 

XAU/USD is in an uptrend from a medium-term perspective. The price of the precious metal continues to make higher highs and lows on the daily chart shown below. Thus, according to the market maxim, “The trend is your friend until the bend at the end,” the technical outlook favors bulls.

Gold price: Daily Chart

A break above the key $2,009 March top would provide confirmation of further upside. The next target for Gold price would then lie at the $2,070 March 2022 highs. 

The key $1,934 March 22 swing low must hold for Gold bulls to retain the advantage. Yet, a break and close on a daily basis below that level would introduce doubt into the overall bullish assessment of the trend. Such a move would probably see a sharp decline to support at $1,890 supplied by the 50-day Simple Moving Average (SMA). 

There is a suggestion Gold price may be forming a triangle pattern as it oscillates to-and-fro between a limited range, and a closer inspection of the pattern on lower timeframes may offer traders opportunities to enter breakout trades at more daring levels than the broader range parameters highlighted above. 

Esther Reichelt, FX Analyst at Commerzbank, analyzes the outlook for the Mexican Peso following the nervousness in the US banking sector.

Banxico has significant scope for rate cuts in case of a crisis

“If the uncertainties were to continue, contrary to our expectations, putting undue pressure on the US economy this is also likely to critically affect the Mexican economy due to the close ties between the two, which would be reflected in a weaker inflation outlook sooner or later.”

“As Banxico has significant scope for rate cuts in case of a crisis thanks to its aggressive rate hike cycle the peso was amongst the biggest losers as a result of the turbulence in the US banking sector. However, if these fade as our economists expect, MXN should quickly retrace its losses thanks to Banxico’s continued hawkish approach.”

• Initial Jobless Claims in the US increased by 7,000 in the week ending March 25.
• US Dollar Index continues to push lower toward 102.00.

There were 198,000 initial jobless claims in the week ending March 25, the weekly data published by the US Department of Labor (DOL) showed on Thursday. This print followed the previous week's print of 191,000 and came in worse than the market expectation of 196,000.

Further details of the publication revealed that the advance seasonally adjusted insured unemployment rate was 1.2% and the 4-week moving average was 198,250, an increase of 2,000 from the previous week's unrevised average.

"The advance number for seasonally adjusted insured unemployment during the week ending March 18 was 1,689,000, an increase of 4,000 from the previous week's revised level," the DOL noted.

Market reaction

The US Dollar struggles to find demand after this report and the US Dollar Index was last seen losing 0.4% on the day at 102.20.

• The US BEA revised Q4 GDP lower to 2.6% from 2.7%.
• US Dollar Index stays deep in negative territory below 102.50.

The real Gross Domestic Product (GDP) of the US expanded at an annualized rate of 2.6% in the fourth quarter, the US Bureau of Economic Analysis' (BEA) final estimate showed on Thursday. This reading came in below the previous estimate and the market expectation of 2.7%. 

"The revision primarily reflected downward revisions to exports and consumer spending," the BEA explained in its press release. "Imports, which are a subtraction in the calculation of GDP, were revised down."

Market reaction

The US Dollar stays on the back foot after this data and the US Dollar Index was last seen losing 0.38% on the day at 102.25.