2 May 2023

Weekly Outlook - Fed, ECB and NFP Could Rile Up Markets

Technical Analysis

After the first look at US Q1 GDP disappointed, markets took solace in better results in tech ahead of major risk events this week, including the Fed and ECB rate decisions, followed by the release of what's expected to be a lacklustre Nonfarm Payrolls number.

3 Top Stories in the Week Ahead

  • Fed expected to pause hiking cycle with 25bps

  • ECB seen hiking by a quarter of a point

  • Nonfarm Payrolls expected below 200K for the first time in over a year

Fed Expected to Hike Despite Looming Recession

In the last FOMC meeting minutes, Fed staff projected that the US would fall into a mild recession later this year. Yet, four out of five traders expect the Fed to hike by another quarter of a point before moving to pause. However, there isn't as much consensus on how clear Fed Chair Powell will be on communicating whether or not another hike is on the table for the meeting after.

With the hike somewhat likely, USD/JPY could move towards 140.00 following the presser, provided JP hints at another hike or at least leaves investors wondering until the next meeting. 137.93 will be a short-term resistance before a decent attempt at the round hurdle. If the Fed Chair communicates more dovishness instead, the pair could turn toward the support of 135.15, bringing 133.00 back on the radar.

Tradingview Chart: US Dollar / Japanese Yen

ECB Seen Hiking as Inflation Remains Sticky

Press reports suggest that ECB officials are consolidating around a 25bps hike at the meeting on Thursday, as the latest reports show inflation remaining stubbornly high. The latest data shows inflation above expectations and increasing in France. Eurozone inflation data is expected to come in right before the ECB meeting, and if it misses expectations enough, it could change the consensus for the rate decision. Officials have said 50bps is not off the table, but it would need extraordinary inflation data.

If inflation in the European Area increases more than expected, EUR/JPY could make a move toward 161.50 as the pair recently soared to 15-year highs following a triangle breakout. The ECB would later support that case, provided the tone is hawkish on renewed hike consensus. If the message is dovish, breaking under the short-term support of 148.20 could clear the path toward 137.44. However, even if the message is neutral or uncertain, the pair could continue its ascend amid the technical breakout, potentially shifting long-term bias to more bullish.

Tradingview Chart: Euro / Japanese Yen

US Nonfarm Payrolls Expected to Slow

The forecast is that the US created 190K jobs in March, down from the 236K reported previously. However, analysts have routinely underestimated the resilience of the US labour market recently. The unemployment rate is not expected to change from 3.5%, with average wages also growing at an unchanged rate of 0.3%.

USD/CHF could end up having already put a low in if Nonfarm payrolls come in upbeat, as the recent channel rejection appears to offer some respite at least. 0.8900 remains strong support bulls need defending unless a decline to a double-bottom low of 0.8760 occurs before a chance at a reversal. Only a big miss would imply a break beneath the latter support, potentially eyeing 0.8582. Otherwise, reclaiming 0.9056 could see prices accelerate toward 0.9447.

Tradingview Chart: US Dollar / Swiss Franc

4 Top Stories in Review

  • First Republic Bank reported earnings, shocking investors with the level of deposit withdrawals and pushing indices down on worries of another round of the banking crisis, but better earnings from tech companies in the middle of the week restored confidence leading to the largest rise in the S&P 500 since January.

  • US Q1 GDP came in at 1.1% compared to the 1.9% expected, with lower yields weighing on the dollar at the end of the week.

  • BOJ rate decision left policy unchanged, with a weaker yen as traders accepted that the new governor wouldn't be changing policy soon.

  • Australia's inflation rate came in above expectations but below the prior quarter, affirming the case for an RBA hike and supporting the Aussie.

Major Calendar Events 02 - 05 May (GMT)


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