Forex Weekly Outlook – Mar. 19-23 – Powell in Play

The US dollar suffered from the ousting of Rex Tillerson, a move that overtook the inflation report as the main market mover. The focus now shifts the first Fed decision by Jerome Powell. In addition, .  Here are the highlights for the upcoming week.

President Trump fired his Secretary of State Rex Tillerson. While Tillerson was not involved in economic policy, another White House ousting increased fears that Trump will take a more hard-line policy. The move followed the resignation of Chief Economic Adviser Gary Cohn and the enaction of tariffs and hurt the USD. Core inflation came out exactly as expected at 1.8% y/y and surprises were not seen in other figures.A slightly upbeat forecast by the UK government helped the pound. The Canadian dollar was hit by a dovish speech by Poloz and also by sliding oil prices.

Updates:

  • UK inflation data: Tuesday, 9:30. Inflation in the UK is stuck at 3%, the top end of the 1-3% target range and the BOE is still considering raising rates in May. The publication will certainly impact the decision later this week. Core inflation was also high at 2.7%. Contrary to other developed countries, Britain does not suffer from deflation. The weaker exchange rate since the EU Referendum is the main culprit for higher prices.
  • UK jobs report: Wednesday, 9:30. Wages remain the main dish in the comprehensive jobs report. Back in December, they rose by 2.5% y/y, as expected, higher than the lows, but still below inflation that is eroding standards of living. The big surprise of the previous report was a rise of the unemployment rate to 4.4%. The jobless claims, known as Claimant Count Change, dropped by 7.2K back in January.
  • Fed decision: Wednesday, 18:00, press conference from 18:30. The new Fed Chair Jerome Powell will most probably raise the interest rate in his first decision. This has been well-telegraphed by Powell and his colleagues. The bigger question is the dot-plot. In December, the Fed continued signaling three hikes in 2018. However, Powell hinted that things have changed since then and listed positive developments. Moreover, the Fed Chair added that four hikes in 2018 would still serve as a gradual withdrawal of accommodation. Yet in another twist since then, wage growth dropped back down to 2.6% quashing the hopes for an acceleration in pay. Inflation is stable at 1.8% on Core CPI and 1.5% on Core PCE, the Fed’s favorite measure. The same dilemma awaits the Fed: try to stay ahead of the curve, anticipating inflation and raising rates at a faster pace? Or wait to see the white in inflation eyes and only react? There is a good chance for an upgrade of the dot-plot to four hikes, but nothing is fully priced in. The USD will initially react to the dot-plot rather than the hike: four is positive while three is negative. The statement will then be digested and this will be followed by Powell’s first press conference. He may provide straighter answers in this initial appearance, thus triggering high volatility.
  • New Zealand rate decision: Wednesday, 20:00. The Reserve Bank of New Zealand decides on interest rates just after the Fed and will probably be unable to move the NZD/USD in the same manner. The team led by Grant Spencer is expected to leave the interest rate unchanged at 1.75%. They may express dissatisfaction with the higher exchange rate but an outright intervention is not on the cards. Any change in the statement will rock the kiwi, but the Fed-related moves may be more significant.
  • Australian jobs report: Thursday, 00:30. In January, Australia reported a small rise in employment, 16K, within expectations but below the levels seen in previous months. The unemployment rate stood at 5.5%. While the job market looks good, policymakers are becoming worried about slow rises in wages and household debt. A tightening of the labor market will help relieve these worries and push the Aussie higher.
  • UK rate decision: Thursday, 12:00. The Bank of England made a hawkish shift in its “Super Thursday” in February by saying that rates will rise faster and earlier than expected. This sent the pound higher. No rate hike is expected in this March decision but markets will try to assess if the BOE is indeed keen on hiking in May, lifting the interest rates to the highest levels since the financial crisis. The voting pattern of the MPC will initially move the markets before the statement and the accompanying meeting minutes will be digested. It will be interesting to see if Governor Mark Carney and his colleagues will react to the latest figures.
  • US durable goods orders: Friday, 12:30. Orders of durable goods serve as a measure of investment and feed into GDP. In January, orders dropped by a 3.6% and also core orders fell short with a slide of 0.3%. Markets focus on the core measure and also on orders ex-defense, ex-air, or the core of the core.
  • US New Home Sales: Friday, 14:00. The last word of the week belongs to the housing sector. Sales of new homes trigger broader economic activity. In January, sales dropped to an annualized level of 593K.
  • *All times are GMT

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    Further reading:

    • EUR/USD forecast – for everything related to the euro.
    • GBP/USD forecast – Pound/dollar analysis
    • USD/JPY forecast – outlook for dollar/yen
    • AUD/USD forecast – projections for the Aussie dollar.
    • USD/CAD forecast – Canadian dollar predictions

    Safe trading!


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