10 April 2023

Weekly Outlook - Minutes to Shed Some Light Into Fed's Last 25bps Decision

Technical Analysis

Worries about global economic health returned last week after OPEC+ announced voluntary production cuts, and traders evaluated the Fed's chances to hike at its next meeting. Focus is now on FOMC minutes and US inflation data.

3 Top Stories for the Week Ahead

  • US CPI expected to come in lower before the minutes on Wednesday

  • FOMC Minutes to shed some light on why Fed hiked 25bps

  • UK rolling 3-month GDP expected to show contraction on Thursday

US Core CPI Seen Slowing Down

US monthly March CPI is expected to show deflationary at -0.1%, but the annualised rate is expected to come down to 5.8% compared to 6.0% prior. A growing majority of traders have been pricing in a rate pause at the next meeting, weighing on yields and the dollar. Part of that is based on the expectation that core inflation will come down even faster to 5.0% from 5.5% prior.

Gold prices have come closer to record highs but received rejection at the upper channel following the triangle breakout extension to $2035/oz. If core inflation drops more than anticipated, it may offer bulls a chance at fresh multiyear highs, with a potential interim millstone at the measured-move high of $2065/oz. In the event core comes in higher than expected, gold prices may decelerate towards $1935/oz, with the sharpness of the potential leg depending on the divergence between the actual and forecasted values. 

Tradingview Chart: Gold Spot / US Dollar

FOMC Minutes and Banking Worries

Up until the collapse of SVB, there was a strong consensus that the Fed would hike by 50bps. Now that things have settled down on the regional bank worries, the question is how much of the FOMC's decision to go for 25bps instead was due to banking jitters and how much focus there is on labour tightness opposed to inflation coming down.

The dollar might come under pressure if the minutes indicate the FOMC decided to hike only 25bps because of the banking crisis, as confidence in Fed will deteriorate while we are not out of the woods yet. Against the euro, $1.10 will be the next obvious target of resistance beneath the peak of $1.1036, but further upside might be restricted to a potential wedge pattern. If the minutes show the FOMC's decision was based on stubborn but falling inflation or labour dynamics, the pair could retreat to $1.0790, with a breach under $1.071 clearing the path towards  $1.06.

Tradingview Chart: Euro / U.S. Dollar

UK 3-month Rolling GDP Back to Negative

After the UK managed to technically avoid a recession by recording +0.1% growth in the final quarter of last year, GDP figures are expected to turn negative, with the 3-month to February average forecast at -0.1%. The BOE, on the other hand, seems more concerned with bringing down inflation as an unending series of strikes has hampered the country's growth.

A deeper contraction than what is expected might see GBP/JPY fall back into the base channel, with 161.90 and 160.72 acting as critical levels of support. Losing the battler on any of the said floors might pave the way to the higher end of 158.00 unless the drop bounces at 160.00. On the flip side, an upbeat figure could accelerate the upward trend, with a break past the peak of 166.42 offering bulls an opportunity at 167.50.

Tradingview Chart: British Pound / Japanese Yen

5 Top Stories in Review

  • OPEC+ announced voluntary production cuts of 1.66M bbl/d for March, rekindling inflation and recession worries as crude prices jumped.

  • US ISM Manufacturing Index fell to 46.3, the lowest level since May 2020, with new orders well below expectations, supporting the general move towards safe havens and gold prices.

  • BOE's Chief Economist Huw Pill said that inflation is unacceptably high for the UK, supporting the pound on expectations that the BOE will keep tightening.

  • RBNZ surprised markets with a 50bps hike compared to the 25bps expected and said more hikes were needed, giving the Kiwi a boost.

  • RBA kept rates on hold, as expected by a slim majority of analysts, but language-affirming potential for further rate hikes supported the Aussie dollar. 

Major Calendar Events 10 - 15 April (GMT) 

Source: Investing.com

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