Weekly Market Outlook: February 26th To March 3rd
Forex
USD
Fed officials wish to see more evidence of disinflation before moving ahead with cutting interest rates.
The dollar edged lower last week, with the dollar index dropping below the 104 level. US treasury yields also declined, with the US 10-year bond yielding approximately 4.25%.
Economic activity data released last week for the US were overall optimistic. Unemployment claims dropped to 201K last week from 213K the week before, against expectations of 217K. The US Manufacturing sector continues to grow, while the growth of the Services sector is slowing down. Flash Manufacturing PMI rose to 51.5 in February from 50.7 in January, against expectations of a much lower print of 50.5. February’s print remains above the threshold of 50, which denotes industry growth, indicating that the US manufacturing sector is expanding at an accelerating pace. The Flash Services PMI index, on the other hand, dropped to 51.3 in February from 52.5 in January, missing expectations of a print of 52.4.
The US Federal Reserve kept interest rates unchanged at its meeting in January, within a target range of 5.25% to 5.50%. The Fed, however, has removed the tightening bias from its policy statement, indicating that the central bank is preparing to pivot to a less restrictive monetary policy. Fed Chair Jerome Powell, however, has discounted the possibility of a rate cut in March.
The minutes of the latest Fed meeting were released on Wednesday and overall held few surprises, reflecting the central bank’s cautious stance. Fed officials wish to see more evidence of disinflation before moving ahead with cutting interest rates. Several Fed officials maintained a hawkish stance last week, indicating that they are not ready to start reducing interest rates.
FOMC members’ opinions are starting to diverge, however, and we may see a battle of doves against hawks at the next policy meeting. For the first time, policymakers are discussing openly the possibility of rate cuts sometime this year. Even though most FOMC members agree that they are not yet ready to start reducing interest rates, markets are interpreting the change in rhetoric as a sign that the Fed is considering a pivot to a more dovish policy.
Rate cut expectations have been fluctuating strongly in the past couple of weeks. The odds of a rate cut in March are practically nil. Rate cut odds in May are also down to 20% from over 80% a few weeks ago. In addition, only 25 basis points of rate cuts are priced in by May, against 25-50bp before. Market expectations of rate cuts are becoming more moderate as policymakers have stated that they intend to start reducing interest rates slowly.
US inflation surprised on the upside last week, boosting the dollar. US Headline inflation rose by 3.1% year-on-year in January from a 3.4% print in December against expectations of a much lower reading of 2.9%. Monthly CPI rose by 0.3% in January, exceeding expectations of a 0.2% print. Core CPI, which excludes food and energy, rose by 0.4%, its higher monthly growth since June, against expectations of a 0.3% raise.
Markets were anticipating a sharp drop in inflation in January, which was not realized, dashing expectations of early Fed rate cuts and boosting the dollar. The progress of disinflation in the US is not steady, limiting the odds of a Fed rate cut before June.
Advance GDP for the final quarter of 2023 showed that the US economy expanded by 3.3% against the expectation of a more modest 2.0% growth. The US economy is expanding at a slower pace, as final GDP data have shown expansion by 4.9% in the third quarter of 2023, but economic growth in Q4 of 2023 exceeded expectations. Advance GDP Price Index for the final quarter of 2023 came in at 1.5% against expectations of 2.3% and a final print of 3.3% in the previous quarter. This indicates inflation, and a lower print indicates cooling price pressures in the US.
In the week ahead, US fundamentals will likely influence the dollar. GDP data on the 28th are especially important as they will reveal the state of the US economy. Core PCE Price Index data on the 29th will also attract traders’ attention. This is the Fed’s preferred inflation gauge, and a lower-than-expected reading may reignite Fed rate cut expectations.
EUR
Final GDP data confirmed that the German economy contracted by 0.3% in 2023, while Germany’s growth forecast for 2024 was revised lower to just 0.2%.
EUR/USD gained strength last week as the dollar weakened, with the currency rate ending the week near the 1.082 level. If the EUR/USD pair declines, it may find support at 1.069, while resistance may be near 1.093.
The ECB kept interest rates unchanged at 4.50%, as expected at its January meeting. The ECB press conference following the conclusion of the meeting did not hold many clues on the central bank’s policy direction. ECB President Christine Lagarde stated that interest rates are currently at sufficiently high levels to bring inflation down to the central bank’s 2% target over time. Lagarde also reiterated that ECB interest rates will remain at sufficiently restrictive levels for as long as necessary. The ECB is expected to pivot to a more dovish policy later this year, but the timeline is still uncertain.
On the data front, Germany’s economy continued to contract, according to GDP data released on Friday. Final GDP data confirmed that the German economy contracted by 0.3% in 2023, while Germany’s growth forecast for 2024 was revised lower to just 0.2%.
The EU Services sector grew more than expected while Manufacturing contracted. Flash Services PMI data released on Thursday showed that the Services sector moved out of contractionary territory and started to expand in February. EU Services PMI rose to the threshold of 50, which denotes industry expansion from a 48.4 reading in January and against expectations of 48.8. The Services sector, on the other hand, contracted at a more rapid pace than anticipated. Flash Manufacturing PMI dropped to 46.1 in February from 46.6 in January, against expectations of 47.0. PMI data for Germany, which is the Eurozone’s leading economy, was even more disappointing. Flash German manufacturing PMI sank to 42.3 in February from 45.5 in January, against 46.1 anticipated. German Flash Services PMI, however, exceeded expectations, with a print of 48.2 in February versus 47.7 in January and 48.0 expected.
Headline inflation in the EU dropped to 2.8% year-on-year in January from 2.9% in December, which was confirmed by final CPI data released on Thursday. Core inflation, which excludes food and energy, cooled to 3.3% from 3.4% in December, as expected.
Current Account data on Tuesday showed that the difference in value between imported and exported goods and services in the Eurozone rose to 31.9B in December from 22.5B in November.
Flash GDP data for Q4 of 2023 showed that the Euro area economy was stagnant with a GDP print of zero, as anticipated. The Eurozone economy does not show sufficient signs of recovery and is on the brink of recession. 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.
GBP
Bailey stated that Britain's economy is showing signs of improvement after falling into recession in 2023 and hinted at rate cuts within the year.
GBP/USD edged higher last week, touching the 1.270 level. If the GBP/USD rate goes up, it may encounter resistance near 1.277, while support may be found near 1.251.
BOE Governor Andrew Bailey has stressed that inflationary pressures are cooling and that further rate hikes are not required. Bailey stated at the BOE Monetary Policy Report Hearings on Tuesday that Britain's economy is showing signs of improvement after falling into recession in 2023. Bailey also hinted at rate cuts within the year. BOE Deputy Governor Ben Broadbent also stated on Tuesday that interest rate cuts during 2024 were possible but this will depend on the British inflation outlook.
The BOE maintained its official rate at 5.25% at its latest meeting, as expected. In addition, the BOE updated its inflation outlook, predicting that inflation will drop to the BOE’s 2% target in the second quarter of the year. This reinforced the notion that the central bank is preparing to cut interest rates.
Market expectations of BOE rate cuts are putting pressure on Sterling. Markets had been pricing in aggressive rate cuts of over 100 basis points this year. In the past couple of weeks, however, rate cut expectations have become more moderate, dropping to 70bp.
Upbeat British PMI data boosted the Sterling last week. Flash Services PMI showed that the Services sector remained firmly in expansionary territory in February, with a print of 54.3, the same as in January. The British Manufacturing sector, however, continued to contract, with Manufacturing PMI rising slightly to 47.1 in February from 47.0 in January. Thursday’s PMI data confirmed that the British economy is improving, alleviating recession concerns.
The British economy remains fragile and may force the BOE to pivot to a more dovish policy. British GDP data released on Thursday showed that the country has slipped into recession. Monthly GDP dropped by 0.1% in December, from a 0.2% growth in November, although market analysts were predicting an even larger drop by 0.2%. Preliminary quarterly GDP data revealed that the British economy contracted by 0.3% in the final quarter of 2023, against expectations of 0.1% contraction and 0.1% contraction in the third quarter of 2023. The British economy expanded by 0.3% in the first quarter of the year and 0.2% in the second quarter.
British headline inflation remained steady at 4.0% year-on-year in January, against expectations of a 4.1% print. Annual Core CPI, which excludes food and energy, grew at the same pace of 5.1% as December and November, against the 5.1% forecast. British inflation is expected to fall towards the BOE’s 2% goal in the coming months, relieving some of the pressure on the central bank to keep high-interest rates.
JPY
Finance Minister Shunichi Suzuki stated on Tuesday that Japanese authorities are closely watching currency moves with a high sense of urgency.
USD/JPY remained firm last week, closing near the 150.5 level on Friday. If the USD/JPY pair declines, it may find support near 148.9. If the pair climbs, it may find resistance near 151.0.
The Yen has retreated to its lowest level in three months in the past two weeks causing alarm in Japanese government officials. The BOJ has intervened at least twice in 2022 to support the Yen by selling dollars and buying Yen to support the country’s currency. Japanese finance minister Shunichi Suzuki reiterated on Tuesday that Japanese authorities are closely watching currency moves with a high sense of urgency. Japanese officials have been issuing warnings against opportunistic short sellers of the Yen, hinting at another intervention to support the currency.
The BOJ kept all policy levers unchanged at its January meeting, maintaining its ultra-easy monetary policy. The BOJ has been keeping interest rates at a negative level, putting pressure on the Yen. The BOJ has so far maintained its dovish bias as other major central banks, and especially the Fed, have raised interest rates to high levels.
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BOJ Governor Kazuo Ueda has hinted at a policy shift down the road. Ueda stated that the likelihood of Japan sustainably achieving the bank's 2% inflation target was gradually increasing. Ueda has also stated that there is a high chance for easy monetary conditions to continue even after the central bank ends its negative interest rate policy.
An immediate policy shift is not expected yet, but markets are pricing in the first BOJ rate hike in April with over 50% probability. A rate hike by June is considered almost certain, with market odds giving over 90% probability of a shift in the BOJ’s monetary policy by June. Only a small rate hike of 10bps is considered likely, which would bring the BOJ’s interest level from negative to zero.
Flash Manufacturing PMI data released last week for Japan were disappointing, putting pressure on the Yen. Manufacturing PMI dropped to 47.2 in February from 48.0 in January, against expectations of 48.2. The Manufacturing index in Japan dropped further below the threshold of 50 which denotes industry expansion, indicating that the manufacturing sector is contracting at a more rapid pace.
Preliminary GDP data for the final quarter of the year showed that Japan's economy contracted by 0.1% against expectations of expansion by 0.2% and 0.7% contraction in the third quarter. The Japanese economy expanded by 1.2% in the second quarter of 2023, showing that the country’s economy is shrinking. Preliminary GDP Price Index data showed a 3.8% annual expansion in Q4, versus 5.0% in the previous quarter. This is a measure of inflation, which shows that inflationary pressures are dropping in Japan. Recession concerns and cooling inflation shrink the odds of a BOJ hawkish pivot in the coming months.
Inflationary pressures are not sufficiently high in Japan to justify a shift to a more hawkish policy yet. National Core CPI data showed that Japanese inflation cooled further in December with headline inflation at 2.3% year-on-year from a 2.5% print in November. Tokyo Core CPI also dropped to 1.6% in January from 2.1% in December.
Gold
Gold prices edged higher last week, buoyed by weakening US treasury yields, as well as by persistent geopolitical risks.
Gold prices gained strength last week, rising to the 2,035 per ounce level on Friday. If gold prices increase, resistance may be encountered near $2,065 per ounce, while if gold prices decline, support may be encountered near $1,984 per ounce.
Gold prices edged higher last week, buoyed by the weakening US dollar and treasury yields, as well as by persistent geopolitical risks. Gold prices have been predominantly directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar edged lower last week, with the dollar index dropping below the 104 level. US treasury yields also declined, with the US 10-year bond yielding approximately 4.25%.
The Fed kept interest rates unchanged at its latest monetary policy meeting within a target range of 5.25% to 5.50%. The Fed, however, has removed the tightening bias from its policy statement, indicating that the central bank is preparing to pivot to a less restrictive monetary policy, boosting gold prices.
Rate cut expectations have been fluctuating strongly in the past couple of weeks, affecting gold prices. Odds of a rate cut in March dropped to 7% after the release of the US inflation data, from over 50% two weeks ago. Rate cut odds in May are also down to 30% from over 80% a few weeks ago. Market expectations of rate cuts are becoming more moderate as policymakers have stated that they intend to start reducing interest rates slowly.
Gold prices are propped up by rising geopolitical tensions, which raise the appeal of safe-haven assets. Concerns that the Geopolitical crisis in the Gaza area may spread to neighboring countries are raising demand for safe-haven assets, boosting gold prices. The war between Israel and Hamas is threatening to spill over the Middle East as tensions rise in the Red Sea area.
Oil
US crude oil inventories missed expectations, boosting oil prices, with a weekly crude stockpile build of 3.5M barrels versus 3.9M barrels anticipated.
Oil prices were volatile last week, with WTI price testing the $79.0 per barrel level resistance on Thursday, then paring gains and dropping to the $76.7 per barrel level on Friday. If WTI price declines, it may encounter support near $75.5 per barrel, while resistance may be found near $79.0 per barrel.
US crude oil inventories released on Thursday showed that the rise in US crude stockpiles missed expectations, boosting oil prices. The US Energy Information Administration reported a weekly crude stockpile build of 3.5M barrels for the week to February 16th, falling short of expectations of a 3.9M barrel raise and following a much larger build by 12.0M barrels the week before.
Raging tensions in the Middle East boost oil prices. Supply concerns provide support for oil prices, as the crisis in the Gaza area threatens to disrupt oil distribution. Tensions around the Red Sea area have been rising, raising concerns that hostilities may spread in the Middle East, affecting oil supply and distribution. Iran-backed Houthi militants are attacking commercial vessels in the Red Sea, raising concerns about oil supply. Oil prices have been rising on reports of ongoing military involvement of the US in the Middle East.
The reduced global oil demand outlook is putting pressure on oil prices. Several major economies, such as the British and the Japanese, have slipped into recession, while other countries are on the brink of recession.
China’s poor economic outlook is increasing concerns of reduced oil demand, putting a lid on oil prices, despite increasing geopolitical risks. Weak economic growth in China raises concerns about future demand, pushing oil prices down.
Oil prices are also kept in check by a strong US dollar and high-interest rates. The Fed kept interest rates unchanged at its latest policy meeting in January, within a target range of 5.25% to 5.50.
OPEC+ has decided to keep its oil output policy unchanged, maintaining the voluntary production cuts that have already been in place. The organization is enforcing substantial production cuts to keep oil prices high. The production cuts are limiting oil supply effectively, as OPEC oil output in January dropped by 410K barrels per day compared to December’s output.
Cryptocurrencies
Ethereum price soared, breaking through the $3,000 resistance level over the weekend for the first time since April 2022.
Most major cryptocurrencies have been on a bullish trend for the past couple of weeks. Bitcoin has crossed major resistance levels, as bulls are prevailing, reaching its highest level since December 2021.
Bitcoin price surged at the beginning of the week, touching the $53,000 level, but could not maintain a bullish trend as bears fought back. Bitcoin price deflated towards the end of the week, trading below the key $52,000 level over the weekend. If the BTC price declines, support can be found at $50,600, while further resistance may be encountered near $52,000 again and further up near $53,000.
Ethereum price soared, breaking through the $3,000 resistance level over the weekend for the first time since April 2022. If Ethereum's price declines, it may encounter support near $2,700, while if it increases, resistance may be encountered near $3,600.
Bitcoin is gaining strength as the Bitcoin halving event is approaching. Every halving event cuts the rate at which new bitcoins are released into circulation in half, increasing the scarcity value of Bitcoin. The halving is scheduled approximately every four years, and the next Bitcoin halving event is expected on April 17th raising the value of the cryptocurrency.
The approval of Bitcoin spot exchange-traded funds (ETFs) by the Securities and Exchange Commission (SEC) caused cryptocurrency prices to surge over the past few weeks. The SEC finally approved 11 applications boosting Bitcoin price.
Cryptocurrency prices are affected by central banks’ interest rates. High-interest rates are putting pressure on risk assets, while the promise of rate cuts boosts crypto markets. The Fed kept interest rates unchanged at its latest meeting, within a target range of 5.25% to 5.50%. The Fed, however, has removed the tightening bias from its policy statement, indicating that the central bank is preparing to pivot to a less restrictive monetary policy.
Markets are under pressure by increased risk-aversion sentiment caused by rising geopolitical tensions. Concerns that the Geopolitical crisis in the Gaza area may spread to neighboring countries drive risk sentiment down putting pressure on risk assets.
Read the full article for more information and to check the important Forex calendar events for this week.
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