27 March 2023

Weekly Outlook - Can Fed's Preferred Measure of Inflation Change Sentiment?

Technical Analysis

After the last series of interest rate hikes where central banks said that they would focus more on data, markets can look forward to the release of Eurozone inflation and China PMIs later in the week. 

3 Top Stories for the Week Ahead

  • Eurozone inflation expected to start coming down finally

  • China PMI expected to show less business confidence

  • US PCE Price index expected to remain sticky

Eurozone Inflation Expected to Slow Down

As the largest component of the Eurozone's economy and the country responsible for pushing the inflation rate to a record high last month, Germany's CPI figures will be in focus first. German inflation is expected to come down 120 bps to 7.5%. The next day the headline CPI rate for the Eurozone is expected to drop to 7.4% from 8.5% prior. But core inflation is expected to tick up to 5.7% from 5.6%, which would be another record high and keep the pressure on the ECB to tighten further.

If any CPI components come in above expectations, investors will probably opt for further ECB aggression, supporting a thesis for euro bids. EUR/AUD could jump higher, bringing 1.6440 into the spotlight, the golden extension of the net distance through the upside leg off 1.5255. But if inflation slows or stalls according to forecasts, the pair could succumb towards 1.5984, confirming the recent exhaustion in momentum. Sliding lower could see the floor at 1.5850 revisited.

Tradingview Chart: Euro / Australian Dollar 4h

China Official PMIs Expected to Decelerate

Following the optimism from China's reopening, the shakeup in the financial markets lately has renewed worries of a global recession. China's NBS tracks the larger state enterprises that are more dependent on exports, which a weaker yuan could impact following the PBOC's easing. China's NBS Manufacturing PMI is expected to expand above 50 but slow back to 51.2 from 52.6 prior.

USD/CNH recently found support near 6.80 after receiving rejection at the upper channel trendline starting on Jan 15. If the support holds firm before the release, an adverse reaction could see prices advance towards 7.00. In the event of an upbeat print, slicing through the sloppy trend could expose the base of  6.70 unless the predominant trend intensifies towards 6.60.

Tradingview Chart: U.S. Dollar / Chinese Yuan 4h

US PCE Price Index Seen Unchanged

The Fed's preferred measure of price changes will be the highlight of the week after the FOMC meeting, which heavily implied that the Fed could pause at the next meeting unless price pressure remained a concern. But monthly core PCE Prices are expected to remain at 0.6%, the same as last month, even though the overall price index is expected to come down slightly to 0.5% from 0.6%.

Missing expectations to the upside could trigger a reversal towards 11685 in Nasdaq, provided the 12k handle gives way to bears. Momentum divergence could add to the downside potential early in the week, bringing the channel top near 12500 in focus. A downbeat print could provide a stepping stone to reclaim the 13k and head towards the peak of 13730 if the divergence between the actual and forecast is wide.

Tradingview Chart: U.S. 100 4h

4 Top Stories In Review

  • The Fed hiked rates by 25bps as expected, but the dovish tone of the statement contributed to falling yields, putting the dollar under pressure despite increased safe-haven flows

  • The BOE also hiked by a quarter point, along with expectations, after the country reported a surprise jump in inflation. The initial jump in the pound faded relatively quickly.

  • Markets were under pressure through the week, dragged by banking stocks following the forced merger between UBS and Credit Suisse to save the latter from insolvency.

  • Reports circulated that OPEC would keep its current output level despite falling crude prices over recession fears. U.S. Energy Secretary Granholm said it would be 'difficult' for the U.S. to replenish the Strategic Petroleum Reserve, with WTI trading below $70/bbl, which the Administration said would trigger buying for the SPR.

Major Calendar Events 27- 31 Mar (GMT) 

Source: Invesing.com

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