Last week the core PCE deflator in the U.S. came in above expectations, shattering any hopes of rate cuts as the market now understands that the Fed is likely to take a higher for longer approach.
The January FOMC meeting minutes showed there were a few Fed members who were in favour of a 50bps rate hike instead of a 25bps one. In light of the strong data prints of late, more Fed members might swing towards a 50bps hike until the next meeting in March.
However, it's too early to tell as that meeting will come with a new dot plot and there's a lot of data yet to come out until then. For now, the market seems to still expect three hikes of 25bps to follow.
This week, Bank of Japan Gov-designate Ueda is expected to speak on Tuesday. That same day we'll get the core CPI y/y for Japan and the GDP q/q for Switzerland. In Canada we'll have the GDP m/m and in the U.S., the CB consumer confidence.
The Australian CPI y/y will be released on Wednesday and Bank of England Gov Bailey will speak in London at the Cost of Living Crisis Conference organized by the Brunswick Group.
This speech is not expected to cause market volatility, but it's worth keeping an eye on it in case he adds something new. The ISM manufacturing PMI will also be published in the U.S. Wednesday, followed by the ISM services PMI on Friday.
A few Fed members are expected to deliver their remarks this week.
BoJ Governor nominee Ueda will share his thoughts on future monetary policy after recently commenting that the current policy is appropriate and there's more work to be done until inflation will hit the Bank's target of 2%.
He pointed out that monetary easing will continue and hinted that BoJ has
to either normalize its policy or find ways of maintaining YCC depending on
whether inflation significantly improves.
There were some expectations that the next BoJ Governor would be more hawkish,
but that now seems unlikely, at least based on his comments made so far.
Bloomberg reports that a recent Nikkei poll on whether the BoJ should continue
monetary easing received an even split of yes and no answers.
For the Canadian economy, the GDP data is expected to be flat. Only a print well above expectations might surprise the market. The BoC decided to pause the hiking cycle and observe the results of the policy so far after CPI data reflected some signs of cooling down. However, despite a strong labour market, Wells Fargo analysts expect that economic growth will slow down this year and forecast a mild recession in the first half of the year.
The Australian CPI data is expected to drop from 8.4% to 8.1% for y/y. The tighter monetary policy is likely to put weight on the economy and a slowdown is expected with the housing market most pressured. The elevated inflation remains a big issue and surprised to the upside in December with some analysts from ING arguing it might be connected with an increase in holiday prices and the culmination of the economic reopening colliding with seasonal holidays.
Since the beginning of the year the data for the U.S. economy has been very strong, possibly due to the warmer weather in January giving a boost to new orders, retail sales and job openings. However, February weather returned to the seasonal norm so it's possible that ISM services indices will have a correction, while ISM manufacturing could come in stronger fuelled by China's reopening and the positive European energy situation.
EUR/USD expectations
On the H1 chart the pair closed the week near the 1.0525 level of support. From there a correction is expected until the 1.0625 resistance. If that level holds the downtrend should resume targeting 1.0455.
On the upside, the next levels of resistance are at 1.0705 and 1.0785.
USD/CAD expectations
On the H1 chart USD/CAD looks good for buying opportunities. A correction
is expected until the 1.3535 support or even 1.3465. If those levels hold, the
next target could be 1.3700.
On the downside the next levels of support are at 1.3375 and 1.3275.
From a fundamental point of view the CAD softened last week, but one of the
main reasons for the pair's strength was the fact that markets now await more
tightening from the Fed. Three 25bps hikes are expected at the next FOMC
meetings until the end of June.
March is seasonally a strong month for the USD, but also for crude oil
which will be supportive for the CAD, so the pair might move in a range.
This article was written by Gina Constantin.