13 March 2023

Weekly Outlook - US CPI Expected to 'Stick' Around as Focus Shifts to Fed Hikes

Technical Analysis

After February NFP failed to provide directionality for whether the Fed will hike by 50 or 25 bps at the next meeting, all eyes are on US CPI figures to firm up expectations ahead of the FOMC meeting.

3 Top Macros for the Week Ahead

  • U.S. inflation numbers line up the Fed after clueless NFP

  • ECB widely anticipated to deliver 50 basis points hike

  • China industrial production to support reopening recovery

All Eyes on U.S. Feb CPI

After Fed Chair Jerome Powell opened the door for a larger data-dependent rate hike, there was much expectation for the NFP. However, the job numbers came in as a mixed bag, with more than expected jobs created and the unemployment rate rising more than expected. Now the question is whether CPI figures will provide directionality for the Fed. Core CPI is expected to remain steady at 5.6%, with an upbeat release seen as justifying a 50bps hike at the next FOMC meeting, missing expectations inclining the chances towards a 25bps hike.

With futures markets fluctuations suggesting markets are still undecided about the pace of the Fed's next hike, the loonie's recent upward spiral does not appear to have printed due to the pricing in of a more hawkish Fed. This, in turn, implies USD/CAD could reach the ceiling of $1.3985 so long it remains above the golden pocket at $1.3698 and breaks past the peak of 1.3863. The drop early in the week could see an increased deceleration to $1.3608, and in the event of a soft CPI, we might revisit the lower end of $1.3517, all Fibonaccis.

Tradingview Chart: U.S. Dollar / Canadian Dollar 4h

ECB to Hike By 50bps

With inflation at a record high for the shared economy, most analysts agree that the ECB has no choice but to hike. ECB's President Christine Lagarde effectively confirmed that the hike would be by half of a per cent. The remaining question is whether there will be an increase to the Q.T. program, which currently stands at €15B a month through June.

EUR/CHF has been in a freefall since it tapped parity at the beginning of March, pressured by momentum divergence. With expectations well-known ahead of time, the 50bps might be already priced in, with investors now focusing on whether there will be an increase in monthly Q.T. If the ECB leaves Q.T. unchanged, it might trigger additional bets to the golden pocket at 0.9667 or lower, depending on the pair's performance during the first half of the week. However, bumping it up might reverse the trend towards parity again, despite the longer-term impact being more neutral-to-bearish due to the ECB likely choosing not to roll off peripheral yields (which would increase German bonds). On the way up, 0.9834 and 0.9938 make temporary resistance levels.

Tradingview Chart: Euro / Swiss Franc 4h

China Industrial Production Expected to Expand

After missing reporting a couple of key macro data figures from January due to the Lunar New Year, China is set to report an increase in industrial production in February to 2.5% compared to 1.3% in December. Retail sales are expected to jump 3.3% compared to -1.8% prior. With investors trying to see how much of a rebound can be expected after the lifting of covid lockdowns, the first undistorted data could be key to the market's reaction.

The Australian dollar could receive a bump against the U.S. counterpart if both reports meet or exceed expectations, particularly if the golden pocket at 0.6543 holds firm ahead of the releases due to momentum divergence.This might enable a rally towards 0.6922, depending on the potential spread between the actual and expected results. Lossing the floor might pave the way to 0.6377, but unlikely to drop lower.

Tradingview Chart: Australian Dollar / U.S. Dollar 4h

Top 6 Stories in Review

  • In Fed Chair Powell's testimony before Congress, he heavily implied the Fed could hike faster at the next meeting if the data came in too strong, pushing the dollar up and stocks down.

  • A liquidity crisis further hit stocks at SVB Financial, which created worries about the banking sector's health and caused a rush towards safe-havens.

  • NFP came in higher than expected but was aided by a sizeable birth-death adjustment and offset by the prior month being adjusted lower. The unemployment rate popped back to 3.6%, where it was back in December.

  • RBA hiked rates as expected, saying that what happens at the next meeting will depend on the data.

  • As anticipated, the BOC paused its rate hike cycle for the first time in 9 meetings but left the door open for more hikes if the data warranted it.

  • BOJ's meeting ended with no changes to policy, and Japan's upper house confirmed Kazuo Ueda to become the new BOJ governor.

Major Calendar Events 13- 17 (GMT)

Source: Invesing.com

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