Olivia

While the consumer price index (CPI) may get the most headlines, the measure of inflation that’s reportedly of greater significance for Federal Reserve policy makers is the core inflation rate, which measures inflation for all items excluding food and energy. In February and March, this metric clocked in at 6.4%, year-over-year — the highest figure since 1982. At this level, an inflationary psychology is becoming an increasing concern, as households and businesses incorporate expectations of elevated inflation in their contractual arrangements. If unchecked, these expectations can become self-fulfilling prophesies. I share this concern and for that reason support the Fed’s planned program to reduce the pace of monetary expansion and raise interest rates. Although this shift in the Fed’s emphasis will likely dampen the pace of economic activity, we can afford that sacrifice because we’re starting from a place where the economy has been growing at a healthy rate and the unemployment rate has reached its lowest level (3.6%) since the start of the pandemic. As this new policy orientation takes hold, we should be clear about what it will likely accomplish and what it won’t. Specifically, I expect ongoing vigilance by the Fed to keep inflationary expectations under control.… Read More »High inflation versus high prices

GBP/USD registered small weekly gains on the back of Wednesday's sharp upsurge. Near-term technical outlook suggests that the bearish bias stays intact. A daily close below 1.3000 could open the door for additional losses. After dropping to its lowest level since November 2020 at 1.2974 earlier in the week, GBP/USD has managed to stage a rebound. Although the broad-based dollar strength didn’t allow GBP/USD to gather further bullish momentum in the second half of the week, the pair ended up closing above 1.3050 to snap a two-week losing streak.  What happened last week? The risk-averse market environment and rising US Treasury bond yields helped the greenback outperform its rivals at the beginning of the week. On Tuesday, the US Bureau of Labor Statistics reported that annual inflation in the US, as measured by the Consumer Price Index (CPI), jumped to a fresh four-decade high of 8.5% in March from 7.9% in February. Further details of the report revealed that the Core CPI, which excludes volatile food and energy prices, edged higher to 6.5% from 6.4% in the same period, compared to the market expectation of 6.6%. Although the initial market reaction to the US inflation report caused the dollar to… Read More »GBP/USD Weekly Forecast: For how long can 1.3000 support hold?

Gold closed the second straight week in positive territory. XAU/USD could extend its rally toward $2,000 before turning overbought. Safe-haven flows continue to dominate the markets amid inflation fears, geopolitical tensions. Gold managed to build on the previous week’s gains and registered its highest weekly close in a month above $1,970. The yellow metal ignored rising US Treasury bond yields for the majority of the week and continued to find demand as an inflation hedge and a safe haven. What happened last week? Gold started the week on a firm footing but erased a large portion of its daily gains after rising all the way to $1,970 on Monday. The negative shift witnessed in risk sentiment on Tuesday provided a boost to the yellow metal. Fading hopes about Russia and Ukraine reaching a peace agreement, the ongoing coronavirus-related lockdowns in China and inflation fears forced investors to seek refuge. Reflecting the sour market mood, major equity indices in the US suffered heavy losses.  The US Bureau of Labor Statistics reported that inflation, as measured by the Consumer Price Index (CPI), surged to a new multi-decade high of 8.5% on a yearly basis in March from 7.9% in February. In the… Read More »Gold Weekly Forecast: XAU/USD eyes $2,000 as bulls retain control

EUR/USD Current Price: 1.0834 Trading is expected to be dull at the end of the week as most countries celebrate Good Friday. The European Central Bank decided to maintain its monetary policy on hold. EUR/USD recovered from a fresh 2-year low of 1.0756 but is still on the bearish path. The EUR/USD pair plunged to 1.0756, its lowest since May 2020, following tepid US data and a dovish European Central Bank monetary policy decision. The central bank kept rates on hold as widely anticipated and repeated that it would end its bond-buying program in the third quarter of the year. Monthly net purchases will amount to €40 billion in April, €30 billion in May and €20 billion in June. The statement was quite dovish, as it noted that Russia's aggression is affecting the economies in Europe and beyond. Higher energy and commodity prices are affecting demand and slowing production, which results in higher inflation. Also, trade disruptions are leading to new shortages of materials and inputs, another factor weighing on prices pressure. President Christine Lagarde said it was “premature” to discuss quantitative tightening, adding that rate hikes could begin “sometime after”  the end of the APP program. Across the pond,… Read More »EUR/USD Forecast: What’s next after testing 1.0760?

ECB leaves rates, asset policies unchanged as expected. Lagarde signals a new assessment in June. Cites the risks of the Ukraine war to growth while acknowledging inflation. Facing the risks of European war for the first time in two generations, the ECB will keep its economic support untouched despite inflation that has rocketed to nearly four times its official target.  Bank President Christine Lagard, who is recovering from covid, said in her virtual press conference that exiting bond-buying is a necessary precursor for a rate increase, which could occur “anywhere between a week to several months” after the end. The ECB’s -0.5% deposit rate and 0.0% interest rate were left untouched.  “Monthly net purchases under the APP will amount to 40 billion euros in April, 30 billion euros in May and 20 billion euros in June,” noted the policy statement accompanying the rate decision.  Ms Lagarde repeated the bank’s previous promise to end bond purchases in the third quarter but declined to be more precise despite reporters' questions. At the 10 billion euros monthly reduction in the bank’s statement the program would end with the final tranche in August.  Futures markets are currently pricing 0.25% increases at the September and December ECB meetings. Eurozone… Read More »Lagarde: Inflation Oui, rate hikes Non, growth N’est-ce Pas

Outlook: We get retail sales and consumer sentiment today, but watch out–the data is a minefield. Sales can rise on inflated prices alone, and picking out what is a true rise vs. a price-only one is well-nigh impossible. Then there are the exclusions, like gasoline, and in addition, some lingering base affects. Last March we had just got the vaccine and sales were still soft, especially in services. Don’t forget the ex-autos idea. Bottom line, efforts to create a “controlled” number–controlled for special factors–are not convincing and all too subjective. As the rest of the world starts copying the Fed (although to be fair, some were ahead of the Fed, like New Zealand and Norway), we see more and more forecasts of rate hikes. The latest is the UK, after yesterday’s high inflation readings. Sterling obediently rose, as did the CAD, finally, on actual action. Gains in other bond yields coupled with a backlash against an overshooting in the YS 10-year was a dollar negative yesterday. The question is whether we get a reality check from the ECB, which is expected to do and say absolutely nothing of use with respect to forward guidance. This looks like they don’t know… Read More »As the rest of the world starts copying the Fed, we see more and more forecasts of rate hikes

EU CPI (Mar) – 21/04 – with the ECB starting to taper its asset purchase program, pressure is increasing for the central bank to outline a plan for raising rates as EU CPI hits new record highs at 7.5%. This is a huge jump on the 5.9% we saw in February and serves to highlight the challenges facing the European Central Bank. PPI prices are also trading at record highs and while core prices are lower when food and energy are stripped out at 3%, this is little comfort to EU consumers who need to eat and move about. Businesses are also struggling as they have to contend with the same challenges when it comes to economic output. EU CPI is expected to be confirmed at 7.5%.         UK Retail Sales (Mar) – 22/04 – UK consumer spending saw a strong rebound in January, after the -0.4% slowdown seen in December. Not only did fuel sales recover, but we also saw a strong rebound in household goods and furniture, with high street sales showing a decent pickup, as 2022 got off to a decent start with a 1.9% rise. This slowed in February as retail sales slipped… Read More »The Week Ahead: UK retail sales, EU CPI, Netflix and Tesla results

Euro has been struggling to find demand since the beginning of April. ECB is widely expected to leave key rates unchanged. A hawkish shift in ECB's policy outlook could trigger a steady rebound in EUR/USD. EUR/USD is already down more than 2% in April amid the apparent policy divergence between the Federal Reserve and the European Central Bank (ECB). The European economy is widely expected to suffer heavier damage from a protracted conflict between Russia and Ukraine than the US economy, and the Fed remains on track to hike its policy rate by 50 basis points in May. The shared currency needs the ECB to adopt a hawkish policy stance in order to stay resilient against the greenback. In March, the ECB left interest rates on the marginal lending facility and the deposit facility unchanged at 0.00%, 0.25% and -0.50% respectively. The bank further announced that monthly net purchases under the Asset Purchase Programme (APP), which were initially planned to end in the fourth quarter, will amount to €40 billion in April, €30 billion in May and €20 billion in June before ending in the third quarter.  The accounts of the ECB’s March meeting revealed earlier in the month that… Read More »ECB April Preview: Quicker end to QE to help euro recover

The Reserve Bank of Australia has surprised investors with a hawkish shift. Australia is expected to have created 40K new jobs in March.  AUD/USD is trapped between Fibonacci levels, employment to be a ‘make it’ or ‘break it’. Australia will release its March employment figures early on Thursday, and this time, the market will be paying more attention than usual to the report. The Reserve Bank of Australia, in its latest meeting, surprised investors by turning hawkish. Policymakers are now open to hiking rates before year-end and announced they will keep a close eye on upcoming inflation and jobs data. Job creation vs wage growth The country is expected to have added 40K new positions in the month, while the Unemployment Rate is foreseen contracting to 3.9% from 4.0%, while the Participation rate is seen increasing to 66.5%. Back in February, Australia added 121.9K full-time positions, quite an impressive figure in the lockdown´s aftermath. Governor Philip Lowe acknowledged that the Australian economy remains resilient in the post-decision statement, which also noted that “inflation has increased sharply in many parts of the world. Ongoing supply-side problems, Russia's invasion of Ukraine and strong demand as economies recover from the pandemic are all… Read More »Australian Employment Preview: RBA to cheer sustained job creation

The global tightening cycle is in full swing with half point interest rate hikes from the Bank of Canada and Reserve Bank of New Zealand. Expectations for changes by both central banks did not stop the Canadian and New Zealand dollars from reacting strongly to these adjustments. The Canadian soared dollar after the rate decision while the New Zealand dollar plunged. Their diametrically opposite movements underscores the importance of policy guidance.   To the surprise of many investors including ourselves, the Canadian dollar sold off ahead of the rate decision, hitting a bottom about an hour before the Bank of Canada raised interest rates by 50bp for the first time in 22 years. This was the bank’s largest single move in more than two decades. According to Governor Tiff Macklem, “the economy can handle higher interest rates, and they are needed.”  Like many countries around the world, Canada is struggling with high inflation – the last consumer price report from February showed prices growing at its fastest rate in 30 years. Russia’s invasion of Ukraine drove prices even higher in March. Although a half point hike and end to bond purchases were widely anticipated, Macklem’s guidance sent the loonie soaring.… Read More »ECB preview and half point hikes for CAD and NZD