20 February 2023

Weekly Outlook - FOMC Minutes in Focus After Talk of 50bps Hike

Technical Analysis

After annual CPI inflation came in hotter than expected, the week ended on a pessimistic note as Bullard wouldn't rule out a 50bps hike at the next meeting. Mester also suggested h would have voted for 50bps last time.

3 Top Events for the Week Ahead

  • FOMC minutes and future hike cycle on Wednesday

  • Eurozone Final CPI Figures on Thursday

  • Waiting for clarity on the new BOJ governor's position

FOMC Minutes Release After Sticky CPI

The latest CPI and PPI figures suggest that inflation is far from coming down in the US. Adding to the surprise the jobs figures from last month, investors are likely to be scanning the FOMC minutes with a new context. Given Mester rotating in as a voter, seeing the new lineup of hawks and doves could shake up markets. Attention is also returning to employment, as some members have pointed out that tightness in the labour market is a concern.

The price of gold could see further upside if the FOMC minutes indicate the meeting details are more dovish than what committee members suggest. Having formed a bottom at the acceleration channel near $1820/oz following a hidden bullish divergence, the next resistance past $1850/oz lies at $1872/oz. The upward leg could extend to $1889/oz if gold advances ahead of the event. Conversely, a hawkish interpretation could trigger a downward spiral, with a slide below the swing low opening the door to $1785/oz.

Eurozone CPI Expected to be Revised Higher

Last month, Germany's CPI release was delayed for technical reasons. Eurostat then calculated that month's inflation for January based on an estimate for the largest economy in Eurozone. When Germany finally released the data, it was slightly higher than the estimate used by Eurostat, meaning the otherwise unimportant second reading of Eurozone inflation could get renewed interest. Analysts anticipate another drop to 8.6% YoY and -0.2% MoM in the headline figures and a flat core.

Although the actual CPI figures will offer an initial bullish or bearish reaction depending on whether they miss estimates, an upward revision could either add to or remove momentum. If the CPI disappoints and last month's figures receive an upward revision, it will impact EUR/CAD the most. Any other combination could be seen as a mixed message unless there is a downward revision. The bounce at the neckline bottom of 1.4238 could continue to the right-shoulder peak of 1.45/46 ahead of the event, with a potential bearish reaction to the CPI paving the way to 1.40 should bearish bets accelerate below 1.4235.

Still Waiting for Direction of New BOJ Governor 

Last Tuesday, the government of Japan confirmed rumours that Kazuo Ueda will replace Kuroda as head of the BOJ in April. He's a relatively unknown academic with few public comments on monetary policy. Following news of his appointment leaking, he provided opinions that both supported the current policy and suggested it would be necessary to end extraordinary easing. Japanese media has reported that Ueda will potentially testify in parliament on Tuesday.

GBP/JPY could soar within an accelerated trend on a hawkish Ueda, breaking above the 38.2% Fibonacci near 162.00 for an attempt at the major 50% of ~164.00. Momentum supports this outlook, leaving a new peak in overbought territories followed by a bounce at the RSI of 50%. If Ueda appears more dovish or mixed thereof, the pair could slide towards 159.32, with the latter case having a weaker impact on price declines, offering a potential bounce by the 160.00 hurdle.

4 Top Events in Review

  • US CPI and PPI came in higher than expected, boosting the dollar and weighing on key US indices.

  • Risk appetite took another leg lower after Mester and Bullard planted the idea of a 50bps hike at the next Fed meeting, with the number of economists forecasting such a move rising at the end of the week.

  • Kazuo Ueda to become the new BOJ governor, prompting some swings in the yen, as it was first seen as potentially a sign that policy would be tightened, but that assessment was later reevaluated given Ueda's comments, leading to a weaker yen.

  • UK CPI fell more than expected, with the monthly reading entering deflation, helping the FTSE gain to record highs and weakening the pound.

Major Calendar Events Feb 20-25 (GMT)

Source: investing.com

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