News

• A triple bottom in the EUR/USD daily chart remains in play but at a brisk of being negated.
• EUR/USD’s price action during the last couple of weeks created a double top, which could shift the pair’s bias.

The Euro (EUR) drops from around weekly highs of 1.0925 on a buoyant US Dollar (USD) and on buyers’ failure to crack the YTD high at 1.0929. Nevertheless, a triple bottom in the daily chart is intact, at the brisk of being negated. At the time of writing, the EUR/USD is trading at 1.0842.

EUR/USD Price action

Failure to hold prices above the 1.0900 figure has exposed the EUR/USD to further selling pressure. A triple bottom in the daily chart remains in play. But, the upward movement was capped at around March’s 23 high of 1.0929, ahead of testing 1.1000.

For a bullish resumption, EUR/USD buyers must reclaim 1.0900, followed by 1.0929. Break above will expose the 1.1000 figure, followed by the YTD high at 1.1032.

Another scenario has developed in the last couple of weeks. Albeit a “triple bottom” is in place, the formation of a double top emerged. Hence, if the EUR/USD continues to dive further and achieves a daily close below the March 24 swing low of 1.0713, it would pave the way to test 1.0500.

Backing up the latter scenario are oscillators. The Relative Strength Index (RSI), although at bullish territory, its slope turned downwards, while the Rate of Change (RoC) shifted neutral.

EUR/USD Daily chart

EUR/USD Technical levels

 

• US Department of Commerce reported that PCE was below estimates, spurring speculations for a Fed shift.
• Oil prices rise after output reduction at several oilfields in northern Iraq?s Kurdistan region.

Western Texas Intermediate (WT), the US crude oil benchmark, is set to finish the week with more than 9% gains after touching a YTD low of $64.41. On Friday, WTI is trading at $75.60 PB, above its opening price by 1.74%.

Wall Street finished the week with substantial gains. Inflation data in the United States (US) reported by the Department of Commerce showed that Personal Consumption Expenditure (PCE) Index rose below estimates. Headline inflation came at 5% YoY, below forecasts of 5.3%, and core PCE was 4.6% YoY, below estimates.

Hence, the odds that the US Federal Reserve (Fed) could pause tightening its policy increased. The CME FedWatch Tool shows that the odds for a pause lie at 49.6%. The latest round of inflation data pointing down improved investors? mood, meaning that less aggressive rate hikes could keep the US Dollar in check.

Oil prices jumped since the halt of Kurdistan oil export through Turkey at the beginning of the week. The total amount of oil shortage was 450K BPD.

In the meantime, according to Reuters sources, the Organization of Petroleum Export Countries (OPEC) agreed to stick to its crude output production at a meeting on Monday.

According to a survey conducted by Reuters, OPEC?s crude oil production for the current month is estimated at 28.90 million barrels per day BPD, which is a decrease of 70K BPD compared to February. Moreover, the current output is more than 700K BPD lower than what was recorded in September.

WTI Technical levels

 

After the release of the March Core Persona Consumption Expenditure Price Index, analysts at Wells Fargo still expect the Federal Reserve (Fed) to hike interest rates by 25 bps at its May monetary policy meeting.

Inflation moderates, but Fed's job not yet done

“Inflation is slowing, but only gradually. The core PCE deflator rose slightly less than expected, up just 0.3% in February, and inflation data for January were revised lower as well. This is a positive development, but a win can't yet be declared.”

“The Fed has further work to do to get inflation back to its 2% target. The core PCE deflator is still running well-above target at a 4.9% annualized rate the past three months. We'd summarize the inflation development as a step in the right direction, but we think the elevated readings keep the heat turned up on the Fed, and thus still expect the Fed to hike rates an additional 25 bps at its May monetary policy meeting.”

• Buoyant US Dollar was the main reason for the AUD/USD’s fall.
• US inflation continues to cool down, while consumer sentiment deteriorated in March.
• TDS Analyst expects the RBA would keep rates on hold, on April’s meeting.
• AUD/USD Price Analysis: Subdued in the near term, awaiting for the RBA’s decision.

The Australian Dollar (AUD) retraces after hitting a weekly high of 0.6738, spurred on the American Dollar (USD) recovery as it got bolstered by weekly, monthly, and quarter-end flows. Wall Street is set to finish the week with gains, while US inflation data could cement the case for a pause in the Fed’s tightening cycle. The AUD/USD is trading at 0.6684, below its opening price by 0.43%.

AUD/USD dwindles below 0.6700 on a buoyant US Dollar

The Fed's preferred inflation gauge, the core PCE published by the US Department of Commerce, increased 4.6% YoY, lower than forecasts and beneath the previous month. Headline inflation was 5%, signaling that the Fed's tightening measures are still curbing inflation.

Susan Collins, President of the Federal Reserve Bank of Boston, expressed approval for the news but emphasized that the Fed still has work to accomplish.

The University of Michigan's (UoM) Consumer Sentiment on its final March reading was 62, worse than expected. At the same time, inflation expectations dropped. For the one-year horizon, American consumers forecast inflation at 3.6%, while for the 5-year horizon, inflation estimations dipped to 2.9%.

Of late, the New York Fed President John Williams said that an uncertain economic outlook and economic data would drive monetary policy. Williams expect inflation to drop to 3.5%, and the Gross Domestic Prodcut (GDP) to contract slightly before rebounding in 2024.

On inflation data, the AUD/USD reacted upwards to 0.6718 before reversing its course, fell sharply below the 0.6700 figure, and printed a daily low of 0.6670. Since then, the AUD/USD stabilized at around 0.6686.

On the Australian front, inflation data would give cues regarding the Reserve Bank of Australia’s (RBA) forward path. The TD Securities Inflation for February was 6.3% YoY, and any readings below the latter can discourage the RBA from continuing to tighten monetary conditions.

TDS expects an RBA’s pause on its tightening campaign

TD Securities Analysts in a note, “The Apr meeting is a close one, with analysts mixed about the RBA decision and markets pricing in no hike from the RBA. We now expect the Bank to pause at the April meeting given the lower Jan-Feb CPI prints and uncertainty over the outlook from the banking turmoil in the near-term.”

AUD/USD Technical analysis

The AUD/USD is trading sideways, as shown by its daily chart, though tilted to the downside. For a bearish continuation, sellers need to reclaim the March 24 swing low at 0.6625, exposing the YTD lows at 0.6564. Once cleared, and the path towards November 10 at 0.6386 is on the cards. On the flip side, if buyers crack 0.6700, that could keep them hopeful that the AUD/USD could test 0.6800 in the near term.

What to watch?

Next Thursday, the Canadian employment report will be released. Analysts at National Bank of Canada expect a gain of 10,000 in jobs in March. 

Key quotes:

“In Canada, March’s Labour Force Survey will be watched closely. The job market has been extraordinarily strong recently, with headcounts expanding by 350,000 over the past 6 months. And while signs of an upcoming reversal remain few and far between, we think such a pace is unsustainable in the medium term.”

“We thus expect more modest gains in the coming months, starting with a +10K result in March. Despite this gain, and assuming that the participation rate remained unchanged at 65.7%, the unemployment rate could still increase by one tenth to 5.1%, the result of yet another sharp expansion of the labor force.”
 

Federal Reserve Bank of New York President John C. Williams said in prepared remarks at the Housatonic Community College in Connecticut that the economic outlook is uncertain and that their decision will be driven by the data. He expects real GDP to grow modestly in 2023 and to pick up next year. 

Key quotes:

“One aspect of inflation that’s important for achieving and sustaining price stability is the anchoring of inflation expectations. Various measures of longer-run inflation expectations have remained well anchored at levels consistent with our 2 percent goal.”

“While the FOMC has taken decisive steps to bring inflation down, lags exist between policy actions and their effects. It will take time for all of our inflation gears to move at a pace that takes us to our 2 percent target. I expect inflation to decline to around 3-1/4 percent this year, before moving closer to our longer-run goal in the next two years.”

“I expect real GDP to grow modestly this year and for growth to pick up somewhat next year. Slower growth and tighter monetary policy will likely lead to some softening in the labor market. So, I anticipate unemployment gradually rising to about 4-1/2 percent over the next year.”

“The economic outlook is uncertain, and our policy decisions will be driven by the data and the achievement of our maximum employment and price stability mandates. I am confident that our actions will bring inflation down to our 2 percent longer-run goal.”
 

 Federal Reserve Bank of Boston President Susan Collins reached the headlines again on Friday, this time in an interview with Reuters. She said that surprises makes it hard to predict what will happen at the next FOMC meeting in May. 

The banking system is in ?good shape? despite some ?pockets? of trouble said Collins. According to her, actions have restored confidence in the sector. She thanked that the stigma tied to drawing on lending facilities have eased. 

Regarding inflation, Collins welcomed the latest Core PCE report but warned that not enough progress has been made. Maintaining tight monetary policy is the key to lowering inflation, explained the Boston Fed President. 

Fed's Collins: Need to balance risk that we don't do enough on inflation vs doing too much

 

A not-so-short week is ahead. Despite the Easter holidays, the US Employment report on Friday warrants action till the last day. The Dollar lost ground again in the last week of March, ending with losses in the first quarter. The short-term trend favors Dollar?s bears, but key data ahead could trigger a correction before it resumes the downside. 

Here is what you need to know for next week: 

US stocks finished the week, the month and the quarter on a positive note, with solid gains, something that seemed unlikely just three weeks ago when the Silicon Valley Bank (SVB) was closed by financial regulators. 

The improvement in market sentiment weighed on the US Dollar, which lost ground across the board, at a moderate pace. Government bond yields rose as volatility eased in the Treasury market. 

Higher yields and risk appetite sent the Japanese Yen sharply lower, which became the worst performer, falling even against the weak US Dollar. USD/JPY rose 250 pips, to the 20-week simple moving average at 133.50 that capped the upside. 

The rally in USD/JPY limited the downside in the US Dollar Index. The DXY posted the third weekly decline in a row and the lowest close since January, around 102.50. 

After an inflation-focused week, attention turns to activity and employment data. The March ISM report will help see how the US economy is performing, while the ADP private employment and Nonfarm Payrolls reports will show if the labor market remains tight. Market activity could be subdued because of Easter Holidays, particularly after Wednesday. 

The Pound outperformed with GBP/USD rising for the third consecutive week and consolidating above 1.2300. Among the best trades of the week was going long GBP/JPY, which gained 2.50%. 

It was a volatile week for the Swiss Franc. USD/CHF approached a key long-term support and then recovered some ground, rising to 0.9150. Next Monday, Switzerland will release inflation data. 

AUD/USD posted a small weekly gain as it continued to move sideways. Australian inflation numbers boosted the odds that the Reserve Bank of Australia (RBA) will remain on hold next Tuesday. 

NZD/USD rose during the week but once again found resistance around 0.6300. The Reserve Bank of New Zealand (RBNZ) will announce its monetary policy decision on Wednesday. 

The Canadian Dollar caught up after lagging for weeks. USD/CAD lost 200 pips, to settle around 1.3540. CAD/JPY rose by 3.35%. Next Thursday, Canada will release its monthly jobs report.

Gold posted another weekly decline as the yellow metal struggles to reclaim the $2,000 level. On the contrary, Silver rose for the third consecutive week, reaching $24.00. 
 

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• Fed’s favorite inflation gauge signals that cumulative tightening continues to curb inflation.
• University of Michigan’s Consumer Sentiment was worse than expected, though inflation expectations cooled.
• GBP/USD Price Analysis: Above 1.2400 could challenge the YTD high; otherwise, it would remain sideways, at around 1.2300-1.2400.

The Pound Sterling (GBP) traded with decent losses in the mid-North American session, pressured by a resurgence of the US Dollar (USD), trimming its Thursday’s losses. Although inflation data could spur a pivot in the US Federal Reserve (Fed) policy stance, market participants buy the US Dollar as the weekly, monthly, and quarter-end looms. At the time of writing, the GBP/USD is trading at 1.2331.

US inflation edged lower, though Fed officials remain resilient in fighting inflation

US economic data from the Department of Commerce revealed that the Fed’s favorite inflation gauge, the core PCE rose 4.6% YoY, beneath forecasts and a prior’s month reading of 4.7%. Headline inflation was 5%, beneath January’s 5.3%, signaling that the cumulative tightening by the Fed continues to temper inflation.

The Fed Boston President Susan Collins welcomed the news but reiterated that the Fed has work to do. The New York Fed President, John Williams, will cross newswires later.

On other data, the University of Michigan (UoM) showed that Consumer Sentiment on its final March reading was 62, worse than expected. At the same time, inflation expectations dropped. For the one-year horizon, the estimated inflation rate is 3.6%, while for the 5-year horizon, consumers estimate inflation to be 2.9%.

After the US inflation data release, the GBP/USD hovered around 1.2400 before collapsing beneath the central pivot point at 1.2357 and extending its losses towards the 1.2340 area. However, an upward correction was capped at the former, and the GBP/USD resumed its downward trajectory, eyeing a test of the S1 pivot at 1.2320.

On the UK front, the economy expanded by 0.1% in Q4 2022, and by 0.6% YoY, according to data from the Office for National Statistics (ONS).

GBP/USD Technical analysis

From a daily chart perspective, the GBP/USD would remain trading sideways after diving below 1.2400. However, the GBP/USD could consolidate in the 1.2300-1.2400 area before extending its recovery past the 1.2423 YTD high. That would pave the way towards 1.2500, with upside risks at a May 27 high of 1.2666. Otherwise, if the GBP/USD prints a close at around 1.2300, that could form a bearish engulfing candle pattern, setting the major for a pullback toward the 20-day Moving Average (MA) at 1.2213.

What to watch?

• XAG/USD surpasses monthly highs amid positive market sentiment, despite the rising US Dollar.
• US Core PCE was below estimates, opening the door for a less aggressive Fed.
• XAG/USD Price Analysis: Expected to continue its rally and test the YTD high of $24.63

Silver price trades at new monthly highs above $24.00 a troy ounce, sponsored by falling US Treasury bond yields. Sentiment continues to be the main driver in the session, with US equities set to finish the month with gains. At the time of writing, the XAG/USD is trading at $24.10, gaining 0.89%.

Fed's Collins welcomed inflation data, but reiterated the Fed's has work left to do

Wall Street continues to print gains across the board. The greenback is pressured by data from the United States (US), which showed inflation tempering; therefore, less aggression by the US Federal Reserve (Fed) is needed.

The Department of Commerce (DoC) featured the Fed?s preferred gauge for inflation, the Core Personal Consumption Expenditure (PCE) for February, which rose by 4.6% YoY, below estimates of 4.7%, while the headline inflation dropped from 5.3% to 5% YoY.

Consequently, US Treasury bond yields edged lower, a tailwind for the white metal, which pushed through the $24.00 threshold for the first time since February 2. The US 10-year Treasury bond yield dropped four basis points (bps) at 3.516%, while US Real Yields stood at 1.26% as of March 30.

In the meantime, the University of Michigan (UoM) Consumer Sentiment for March was lower than expected, at 62, as opposed to the foreseen 67. Moreover, the survey updated that American consumers revised their inflation expectations downward. For the one-year horizon, the estimated inflation rate is 3.6%, while for the 5-year horizon, consumers estimate inflation to be 2.9%.

On the central bank side, Boston Fed?s President Susan Collins said that PCE inflation data is positive news, yet there?s still more work to do to bring inflation towards the 2% target.

XAG/USD Technical analysis

Given the backdrop, the XAG/USD is set to extend its rally and test the YTD high at $24.63. The Relative Strength Index (RSI), albeit at overbought conditions, backed the uptrend, while the Rate of Change (RoC) portrays buyers piled around the $22.00 area. The XAG/USD might consolidate as the RSI exits from overbought conditions, as buyers prepare to assault $25.00. if the XAG/USD clears $24.63, the psychological $25.00 barrier would be exposed. Once cleared, on April 18, 2022, resistance at $26.21 is next.

 

• USD/CHF drops as US core PCE rose by 4.6% YoY, below the previous month.
• The University of Michigan’s Consumer Sentiment was below expected.
• USD/CHF Price Analysis: Presses toward 0.9100, but sellers struggle to break that support below.

USD/CHF falls to a new weekly low below 0.9126, sponsored by economic data from the United States (US) showing that inflation is cooling down. Hence, bets that the US Federal Reserve (Fed) might pause its tightening cycle, increasing, meaning the greenback would be under pressure. At the time of writing, the USD/CHF is trading at 0.9127, below its opening price.

US core PCE edges lower, cementing the case for a Fed’s pause

The Federal Reserve’s preferred gauge for inflation, the core Personal Consumption Expenditure (PCE), rose by 4.6% YoY, below the previous month’s 4.7%. On a monthly basis, inflation that excludes food and energy rose by 0.3%, below estimates of 0.4%.

Of late, the University of Michigan’s (UoM) Consumer Sentiment was below estimates of 67 and came at 62. According to Joanne Hsu, director of the survey, said, “Overall, our data revealed multiple signs that consumers increasingly expect a recession ahead.” The same study showed that inflation expectations for one year stood at 3.6%, down from 3.8%, while for a 5-year horizon, consumers estimate inflation at 2.9%.

The USD/CHF extended its losses amidst positive news on the US front. Although the Boston Fed President Susan Collins welcomed the data, she said it hadn’t changed her outlook, adding that the Fed has more work to do.

On the Switzerland front, the Swiss National Bank (SNB) continued to tighten monetary conditions when it raised rates by 50 bps on March 23 toward the 1.50% area. Furthermore, Retail Sales in February rose by 0.3% compared with the previous year, giving a leg-down to the USD/CHF pair.

USD/CHF Technical analysis

Even though the USD/CHF continued to press towards the 0.9100 figure, the sellers could not register a decisive break below the latter. Technical indicators like the Relative Strength Index (RSI) and the Rate of Change (RoC) are flat, suggesting that sellers are jumping from the boat. However, if the USD/CHF dives below 0.9100, that would open the door to challenge the YTD low at 0.9059. On the flip side, buyers reclaiming 0.9150 could pave the way for a recovery to 0.9200 and beyond.

 

• Gold price pulls back after spiking higher following lower-than-forecast US Personal Consumption Expenditure price data.
• Three Federal Reserve officials say more work needs to be done to bring down inflation.
• Never mind deposits, what about bank?s assets? Questions economist who sees crisis reviving and Gold exceeding $2,000.
• Gold may be forming a triangle in an uptrend. If ?the trend is your friend?, bulls may be right.

Gold price (XAU/USD) pulls back from its highs on Friday, exchanging hands in the $1,970s at time of writing, as the dust settles after the release of lower-than-expected Core Personal Consumption Expenditure - Price Index (PCE) data from the US. At its high for the day Gold price has touched a critical resistance from a triangle pattern unfolding on the charts, which is keeping traders guessing as the precious metal's next move.  

Inflation eases in March, could Fed pause?

The preliminary PCE price index data out on Friday showed a slight decline to 4.6% YoY in February when 4.7% had been expected, the same as January. On a monthly basis inflation rose 0.3% versus 0.4% forecast from 0.5% previously. The market response has been for US Treasury yields to pull back, the US Dollar to edge down, with the redult that Gold price popped higher. 

The lower-than-expected inflation data raises the chances the Fed will do nothing at its May meeting and perhaps even that it may actually cut rates later in the year. Lower interest rates favor Gold because they reduce the opportunity cost of holding the precious metal vis-a-vis cash or cash equivalents.  

A gift to Gold bulls from lower-than-expected US data

The PCE data follows the trend of macroeconomic data out on Thursday which was overall poorer than expected. Initial Jobless Claims showed an unexpected rise in the number of out-of-work people claiming unemployment support in the US from 191K to 198K ? higher than the 196K forecast by economists. US Gross Domestic Product (GDP) for the fourth quarter also moderated down to 2.6% from 2.7% in Q3, when 2.7% had been forecast.

Friday's reaction to the data is similar to the overall reaction to the data on Thursday when Gold gained as the US Dollar also sold-off and US Treasury yields pulled back, reflecting investors? view that the probabilities had slightly decreased for the US Federal Reserve to raise interest rates at their May meeting. 

Fed members say more work needs to be done to bring down inflation

Despite lacklustre US data seemingly painting a more subdued picture of the US economy that suggests rates won't rise, comments from Fed members seem to signal the opposite. Over the last 24-hours no less than three members of the Federal Reserve Open Market Committee (FOMC) ? two of them voting members ? have come out at said they think more should be done to combat persistent inflation. 

"Inflation remains too high, and recent indicators reinforce my view that there is more work to do to bring inflation down to the 2% target associated with price stability," Federal Reserve Bank of Boston leader Susan Collins said in remarks to a gathering of the National Association for Business Economics. It should be noted that Collins is not a voting member of the FOMC. 

Next, Neel Kashkari, head of the Minneapolis Fed said the institution has "more work to do," but he did not state what form that would take. Kashakari does have a vote on the FOMC.

Finally, Federal Reserve of Richmond President Tom Barkin said in a speech to the Virginia council of CEOs on Thursday that, "If inflation persists, we can react by raising rates further. It was only a few weeks ago that some were calling for a 50-basis-point increase."

At the time of writing, the Fed Funds Future Curve, a highly considered market gauge of future Fed policy moves was showing an increased 51% chance of a 0.25% hike in May versus a 49% probability of no-change.

This shows a substantial shift from the reading a day ago, when the same indicator was showing ther chances of a Fed hike at only 44%.

Some analysts still expect the Fed to raise rates by more than just one 0.25% hike, before it ends its tightening cycle. Analysts at ANZ Bank, for example, forecast the Gold price to remain capped at current levels as the Fed will continue raising interest rates, possibly to 5.5% (from a current 5.0% level). 

?Further upside in the Gold price looks limited in the short term, as we see the federal fund rate at 5.5%," says the bank.

?Gold is well supported by US recession fears, easing inflationary pressure and more dovish monetary policy. Nevertheless, the upside looks limited in the near term amid easing banking risks and further Fed rate hikes," adds ANZ.

Yet the Australian lender also sees more upside as possible on further banking risks, which would increase safe-haven flows to the yellow metal.

Gold to rise as banking crisis not over, says esteemed economist

The banking crisis is far from over and when it reignites the price of Gold will rise above $2,000 an ounce as people grope for safety, according to distinguished economist, David Rosenberg, the founder of Rosenberg Research.  

So far the analysis of the banking crisis has focused on deposit risk but people are ignoring equally disturbing risks from the assets banks hold, argues Rosenberg in an interview with Kitco.com 

"Everybody's focused on deposit insurance, concentrated uninsured deposits on the liability side of the balance sheet. But you know, the other part of the story is going to be what do the assets look like?" The economist said.

The availability of credit is shrinking, inflation remains high and the US is on the brink of recession. When people tighten their belts the risk of rising default rates on many of the loans held by regional banks could push a fresh tranche of lenders over the edge.

?Nobody talks about the quality of the assets ? these traditional loans, especially as they pertain to commercial real estate business loans, credit cards and auto loans. A lot of these loans are held at the regional bank level," said Rosenberg.

Gold price technicals: Triangle almost complete in uptrend

Gold price continues its steady rise within a probable symmetrical triangle formation most clearly delineated on the 4-hour timeframe chart. XAU/USD has probably completed the fourth leg of the triangle after Gold price hit a high of $1,987 on Friday, peaking just shy of the upper broderline. It is possible it will now reverse at resistance from the borderline and start declining to the lower borderline at about $1,958 in a fifth wave. It could also go higher. Regardless, given the triangle is almost complete there is an increased chance now of a breakout at any time. 

Given the prior trend before its formation was bullish the odds favor an upside breakout, of the same length as the triangle at its widest part or a Fibonacci ratio thereof. This suggests a target of about $2,050 if higher, and $1,890 if the break is lower.

Gold price: 4-hour Chart

Looked at from a broader perspective Gold price continues to make higher highs and lows on the daily chart and the current symmetrical triangle pattern is more probably a continuation pattern than reversal. According to the market maxim, ?The trend is your friend until the bend at the end,? the technical outlook thus 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 $1,990 supplied by the 50-day Simple Moving Average (SMA). 

 

Gold is supported by weaker USD and easing inflationary pressures. Economists at ANZ Bank forecast XAU/USD at $2,050 by the end of the year.

Silver to outperform Gold in a rising price environment

?We believe US recessionary fears, easing inflationary pressure and dovish monetary policy will drive Gold?s performance.?

?The macro backdrop will also remain supportive, so any price dips should be short lived, prompting opportunistic buying. We target gold at $2,050 towards year-end.?

?We expect Silver to outperform Gold in a rising price environment.?

Economists at TD Securities discuss GBP outlook and expect the EUR/BP pair to hit the 0.90 level.

Data trends favor EUR/GBP higher

?We upgraded our GBP view, underscoring the lift from a weaker USD profile. That said, we still think EUR/GBP revisits 0.90, as China reopening and relative Asian growth outperformance favor EUR relative to its European peers.?

?Domestic fragilities should keep GBP anchored relative to EUR and CHF at least.?

?GBP's growth and inflation mix is still poor relative to EUR, which gets a better terms of trade and China lift.?

 

US President Joe Biden delivered a statement following the February PCE report, highlighting the progress in the ?fight against inflation?. 

Quotes from the statement: 

?We are making progress in the fight against inflation. Today?s report shows annual inflation down by nearly 30 percent from this summer, against a backdrop of low unemployment and steady growth. The fight against inflation isn?t over, and every day my Administration is working to give families more breathing room.?

?In February we saw the lowest food inflation in nearly two years.?

?We should continue to invest in America from the middle out and the bottom up. This is not the time to turn back to trickle-down economics by cutting American manufacturing and other critical programs American families count on, just to pay for tax cuts for the wealthy, Big Pharma, and Big Oil. The last thing our economy needs right now is the reckless threat of a chaotic default. Those threats must be taken off the table.?
 

• March UoM Consumer Confidence Index revised lower to 62.0 from 63.4 flash estimate.
• Limited impact from turmoil in the banking sector.
• DXY up 0.09% for the day, off highs.

Consumer sentiment in the US weakened in March more than what was previously reported, according to the University of Michigan's (UoM) Consumer Confidence report. The Consumer Sentiment Index was revised from the flash estimate of 63.4 to 62.0 in March, against the market expectation of 63.2.  Current Economic Conditions fell from 70.7 in February to 66.3 and the Index of Consumer Expectations declined from 64.7 to 59.2.

“This month’s turmoil in the banking sector had limited impact on consumer sentiment, which was already exhibiting downward momentum prior to the collapse of Silicon Valley Bank. Overall, our data revealed multiple signs that consumers increasingly expect a recession ahead”, said Joanne Hsu, Surveys of Consumers Director.

Regarding inflation, year-ahead expectations “receded from 4.1% in February to 3.6%, the lowest reading since April 2021, but remained well above the 2.3-3.0% range seen in the two years prior to the pandemic.” Five-year expectations came in at 2.9% for the fourth consecutive month.

Market reaction

The US Dollar Index is rising modestly on Friday. It started to move off highs after the US Core PCE March report and it has been trending lower afterwards. As of writing trades at 102.25.

The Euro needs time, but the Yen still needs change, economists at Société Générale report.

EUR/USD: Waiting for things to calm down before rising

“If/when uncertainty about the global macro and geopolitical backdrop decreases, EUR/USD should move higher. USD/JPY on the other hand needs more BoJ action to justify a big move lower unless Fed easing becomes a realistic short-term prospect.”

“If the BoJ does nothing, and Treasury yields don’t fall, USD/JPY will probably rise. We expect the next policy move in June, which doesn’t really suggest that USD/JPY will break out of its 128-138 year-to-date range.” 

“We haven’t changed our forecast of an eventual move to USD/JPY 125, but a more aggressive BoJ adjustment than we expect could see another sharp bout of Yen strength.”

 

• US Dollar Index looks to end the third straight week in negative territory.
• EUR/USD bullish bias stays intact in the near term.
• Quarter-end flows could impact the USD's valuation ahead of the weekend.

The US Dollar (USD) started this 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 (DXY) continued to push lower and came within a touching distance of 102.00 before staging a modest rebound early Friday. 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 USD staged a technical correction against its major rivals but lost some of its strength after softer-than-expected inflation data. The US Bureau of Economic Analysis reported that the Core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred gauge of inflation, declined to 4.6% on a yearly basis in February from 4.7% in January. On a monthly basis, Core PCE inflation rose 0.3%, compared to the market expectation of 0.4%. Nevertheless, the DXY remains on track to end the third straight week in negative territory and has lost more than 2% in the month of March. 

Daily digest market movers: US Dollar struggles to extend rebound

• Annual PCE Price Index declined to 5%, Core PCE Price Index edged lower to 4.6%.
• The CME Group FedWatch Tool shows that markets are pricing in a nearly 50% chance that the US Federal Reserve will leave its policy rate unchanged at the upcoming meeting.
• 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.
• Brazil and China have reportedly reached an agreement to ditch the US Dollar as an intermediary in trade transactions.  
• Wall Street's main indexes look to open in positive territory as US stock index futures trade modestly higher after inflation figures.
• 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. 
• 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%. 
• The benchmark 10-year US Treasury bond yield has been moving sideways between 3.5% and 3.6% following Monday's decisive rebound.
• While speaking on Monday, Federal Reserve Governor Philip Jefferson refrained from sharing his view about whether the Fed should continue raising interest rates.
• 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.
• CME Group FedWatch Tool shows that markets are pricing in a 45% 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%. In the Eurozone, the annual Harmonized Index of Consumer Prices (HICP) ticked up to 5.7% in March from 5.6% in February.
• FDIC issued a statement over the weekend announcing that First Citizens BancShares Inc bought all the loans and deposits of SVB. 

Technical analysis: US Dollar on the back foot 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 50-day Simple Moving Averages after having tested it 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 the 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 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.
 

The Canadian economy saw a sharp rebound to begin the new year. CAD barely budged following the stronger data. 1.35 should offer key support but could face a serious test should US data falter in the coming weeks, economists at TD Securities report.

CAD GDP starts 2023 on an even stronger foot than expected

“The Canadian economy roared back to life in January with industry-level GDP exceeding the market consensus with a 0.5% gain. Details were even more upbeat, with broad-based growth and new projections for GDP to rise by 0.3% in February.”

“The CAD barely changed following the stronger GDP report. That may be muddled by quarter-end rebalancing flows. That said, USD/CAD has put in a decent reversal in rather short order from 1.38. So, insofar as this data has altered probabilities for BoC pricing, the pair may have already been priced in.”

“For now, we think 1.35 will be key support for USD/CAD but note that the pair still trades moderately rich. Should US data print on the softer side in the next couple of weeks, that support level could face a serious test.”