Market Outlook for the Week of 20-24 March

News

Last week the CPI data in the U.S. came in above expectations with headline
inflation rising 0.4% and core CPI by 0.5%. The ECB hiked its interest rates by
50bps stressing that inflation is projected to remain too high and refrained
from signalling any future policy changes.

They also noted the high levels of uncertainty in the financial markets and
said it will take a data-dependent approach.

For this week, on Tuesday we’ll get the CPI print in Canada and the U.S.
existing home sales data. ECB President Lagarde will speak in a panel titled
“CBDCs: Keeping momentum in uncertain times” at the Bank of
International Settlement Innovation Summit in Basel.

This type of event is not expected to create market volatility, but it’s
worth keeping an eye on it in case she comments on the banking stress situation
or future rate hikes.

Wednesday will bring the U.K. CPI data and what is likely the week’s most
awaited event: the FOMC Policy Announcement and the Federal Funds Rates.

This will be followed by the SNB Monetary Policy Assessment, Policy Rate
and press conference on Thursday as well as the MPC official bank rate votes in
the U.K., the monetary policy summary and the official bank rate. In the U.S.,
the unemployment claims, and new home sales data will also be released.

On Friday we’ll get the flash manufacturing and flash services PMIs for the
euro area, U.K. and the U.S.

The CPI data for the Canadian economy is eagerly awaited as it will be the
last print before the next BoC meeting in April. The economy is holding up
reasonably well, but the tight labour market, elevated levels of inflation and
high wage growth might force the bank to resume its tightening cycle. As a
reminder, at the last meeting, the BoC decided to hold rates. The consensus for
the CPI y/y is to rise from 5.9% to 6.1% and the CPI m/m to also rise by 0.7%.
The BoC meeting minutes will be released the following day and might contain
clues about potential future rate hikes.

The CPI for the U.K. is expected to show signs of cooling down with the
consensus for m/m at -0.4%. A surprise on the downside will likely suggest the
BoE hiking cycle is nearing its end.

Wednesday’s FOMC decision and Chairman Powell’s press conference will be
the highlight of the week. The market consensus is for a 25bps hike, but swaps
indicate only 16bps of tightening is currently priced in at this time,
according to Scotiabank.

It will be interesting to see the Fed’s reaction to the current stress in
the banking sector combined with elevated levels of inflation. There are a few
analysts who argue that it would be appropriate for the Fed to hold or even cut
the rates.

However, rate cuts at the moment might be a reckless action especially with
the high inflation still looming. In conclusion, a 25bps hike seems to be the
base case as assessing the impact of the current banking sector events needs
more time.

At the SNB meeting analysts expect a 50bps or even a 75bps rate hike. In
Switzerland inflation remains high, but even though it’s not as high as in
other developed countries, the latest rise in domestic CPI is a cause for
concern.

The SNB estimated inflation for Q1 at 3.0%, but it currently sits above its
estimation, at 3.4%. This would justify a 75bps hike, but due to the Credit
Suisse turmoil, the bank might opt for a more moderate 50bps hike and see how
the situation evolves. As a reminder, the SNB also hiked the rate by 50bps in
December to 1%.

At this week’s BoE meeting the consensus is for a 25bps rate hike which is
supposed to be the last one. It will be interesting to watch what the Governor
has to say about the situation in the banking sector and the risk of contagion
as a consequence of Credit Suisse’s problems.

At the last ECB meeting President Lagarde went ahead with a 50bps hike
fearing that stepping back from its pace of tightening might spread fear among
investors, so BoE might follow the same reasoning.

Flash manufacturing and flash services PMIs for the eurozone have shown
signs of improvement since the beginning of the year. The softening energy prices
have given some relief to consumer purchasing power, adding some optimism about
the economy.

The consensus for the services PMI is 52.5, which is slightly below the
February print at 52.7, but still in expansion territory. The manufacturing
PMI, however, while recovering, remains in contraction overall, with 48.5 in
February and an expected moderate increase to 48.9 in March.

Everyone is looking for clues on how the banking sector woes might impact
businesses, but for now it’s too early to see it in the data.

For the U.K flash PMI, analysts will watch if the surprising increase in
February, which put the index into expansion territory at 53.1 for the first
time since July 2022, will continue, which could indicate further side of
activity recovery.

While still on the decline, the housing market situation in the U.S. started to
stabilize since the beginning of the year after a period of pressure due to
high mortgage rates. The consensus is
for a rise in existing home sales data for February, but new home sales are
expected to see a decline following the January 7.2% jump.

USD/CAD expectations

The pair ended the week without a clear direction and could continue to
move in a range. The FOMC meeting could cause some volatility, as well as the
CPI data in Canada if it surprises on the upside.

Overall, the USD/CAD has room for further appreciation. A hawkish tone from
the Fed coupled with the new Dot Plot might fuel an appreciation tendency as
investors seem to be indifferent to the CAD.

A correction is expected until the 1.3685 level of support and if that
level holds the next target could be the 1.3855 level of resistance.

On the downside, the next level of support is at 1.3585.

GBP/CHF expectations

On the H1 chart the pair closed the week near the 1.1310 level of
resistance. A bearish divergence seems to be forming that could suggest a
bigger correction until the 1.1160 level of support, if the fundamentals align.
If that level holds, the next target could be 1.1365. On the upside, the next
level of resistance is at 1.1435.

A risk for this trade is the BoE and the SNB monetary policy announcements.

This article was written by
Gina Constantin.

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