Weekly Market Outlook: February 19th to February 25th

By Myrsini Giannouli

Forex

USD

Markets were anticipating a sharp drop in inflation in January, which was not realized, dashing expectations of early Fed rate cuts, and boosting the dollar.

The dollar was volatile last week, with the dollar index surging to the 105 level mid-week, then dropping to the 104.3 level by the end of the week. US treasury yields were also volatile, with the US 10-year bond touching the 4.31% level mid-week, then retreating to approximately 4.28%.?

US fundamentals will affect the dollar strongly in the weeks to come as these are likely to influence the Fed’s future policy. Weak US retail sales data on Thursday put pressure on the dollar. Retail sales dropped by 0.8% in January against expectations of a 0.2% drop and 0.4% growth in December. Core Retail sales, which exclude automobiles, shrank by 0.6% in January versus 0.2% growth anticipated and 0.4% growth in December.

US inflation surprised on the upside on Tuesday, boosting the dollar. US Headline inflation rose by 3.1% year-on-year in January from a 3.4% print in December against expectations of a much lower reading of 2.9%. Monthly CPI rose by 0.3% in January, exceeding expectations of a 0.2% print. Core CPI, which excludes food and energy, rose by 0.4%, its higher monthly growth since June, against expectations of a 0.3% raise.?

Markets were anticipating a sharp drop in inflation in January, which was not realized, dashing expectations of early Fed rate cuts and boosting the dollar. The progress of disinflation in the US is not steady, limiting the odds of a Fed rate cut before June.

On Friday, the US PPI also came out hotter than expected, registering its highest rise in five months. Producer prices increased by 0.3% in January against expectations of a 0.1% raise and a drop of 0.1% in December. Core PPI, which excludes food and energy, also exceeded expectations, rising by 0.5% in January versus o.1% anticipated and a drop of 0.1% in December.

Advance GDP for the final quarter of 2023 showed that the US economy expanded by 3.3% against the expectation of a more modest 2.0% growth. The US economy is expanding slower, as final GDP data have shown expansion by 4.9% in the third quarter of 2023, but economic growth in Q4 of 2023 exceeded expectations. Advance GDP Price Index for the final quarter of 2023 came in at 1.5% against expectations of 2.3% and a final print of 3.3% in the previous quarter. This is an indicator of inflation, and a lower print indicates cooling price pressures in the US.

The US Federal Reserve kept interest rates unchanged at its meeting in January, within a target range of 5.25% to 5.50%. The Fed, however, has removed the tightening bias from its policy statement, indicating that the central bank is preparing to pivot to a less restrictive monetary policy. Fed Chair Jerome Powell, however, has discounted the possibility of a rate cut in March.?

FOMC members’ opinions are starting to diverge, and we may see a battle of doves against hawks at the next policy meeting. For the first time, policymakers are discussing openly the possibility of rate cuts sometime this year. Even though most FOMC members agree that they are not yet ready to start reducing interest rates, markets are interpreting the change in rhetoric as a sign that the Fed is considering a pivot to a more dovish policy.?

Rate cut expectations have been fluctuating strongly in the past couple of weeks. Odds of a rate cut in March dropped to 10% after the release of the US inflation data from over 50% two weeks ago. Rate cut odds in May are also down to 30% from over 80% a few weeks ago. In addition, only 25 basis points of rate cuts are priced in by May, against 25-50bp before. Market expectations of rate cuts are becoming more moderate as policymakers have stated that they intend to start reducing interest rates slowly.?

In the week ahead, traders will focus on the minutes of the latest Fed meeting on the 21st for hints on the Fed’s policy outlook.

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EUR

Eurozone economy was stagnant in Q4 of 2023, indicating that the EU economy does not show signs of recovery and is on the brink of recession.

EUR/USD edged higher last week, touching the 1.078 level as the dollar weakened. If the EUR/USD pair declines, it may find support at 1.069, while resistance may be encountered near 1.093.

The ECB kept interest rates unchanged at 4.50%, as expected at its January meeting. The ECB press conference following the conclusion of the meeting did not hold many clues on the central bank’s policy direction. ECB President Christine Lagarde stated that interest rates are currently at sufficiently high levels to bring inflation down to the central bank’s 2% target over time. Lagarde also reiterated that ECB interest rates will remain at sufficiently restrictive levels for as long as necessary.?

Lagarde delivered a dovish testimony before the Committee on Economic and Monetary Affairs of the European Parliament in Brussels on Thursday. Lagarde stated that recent EU economic data pointed to inflation dropping to the ECB’s target, raising expectations of ECB rate cuts in the coming months. The ECB is expected to pivot to a more dovish policy later this year, but the timeline is still uncertain.?

Headline inflation in the EU came in at 2.8% year-on-year in January. Eurozone inflation dropped from 2.9% in December, although markets were anticipating an even lower 2.7% print. Core inflation, which excludes food and energy, cooled to 3.3% from 3.4% in December, which again was just above the 3.2% expected.

Eurozone fundamentals last week fell in line with expectations and did not affect EUR/USD significantly. EU employment rose by 0.3% in the final quarter of 2023 against expectations of 0.2% growth and by 1.3% year-on-year. Flash GDP data for Q4 of 2023 showed that the Euro area economy was stagnant, with a GDP print of zero, as anticipated. The Eurozone economy does not show sufficient signs of recovery and is on the brink of recession. EU economy contracted by 0.1% in the third quarter of 2023 and barely expanded in the second quarter by 0.1% after contracting by 0.1% in Q1.?

Economic sentiment in Germany and the Eurozone as a whole continued to climb, according to data released on Tuesday. German ZEW Economic Sentiment, a leading indicator of economic health, rose to 19.9 in February from 15.2 in January, against expectations of a 17.4 print. EU Economic Sentiment also exceeded expectations, climbing to 25.0 in February from 22.7 in January versus 20.1 predicted, as analysts are gaining more confidence in the economic outlook of the Eurozone.?

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GBP

Preliminary quarterly GDP data revealed that the UK has slipped into recession, with the British economy contracting by 0.3% in the final quarter of 2023.

GBP/USD traded sideways last week, oscillating around the 1.260 level. If the GBP/USD rate goes up, it may encounter resistance near 1.278, while support may be found near 1.251. Markets were quiet on Monday ahead of Tuesday’s US and Wednesday’s UK inflation data.

The BOE maintained its official rate at 5.25% at its latest meeting, as expected. MPC members, however, were more divided than ever. Six members voted to keep rates unchanged, two voted in favor of a 25bp rate hike, and one member voted in favor of a 25bp rate cut. In addition, the BOE updated its inflation outlook, predicting that inflation will drop to the BOE’s 2% target in the second quarter of the year. This reinforced the notion that the central bank is preparing to cut interest rates.?

BOE Governor Andrew Bailey has stressed that inflationary pressures are cooling and that further rate hikes are not required. Market expectations of BOE rate cuts are putting pressure on Sterling. Markets had been pricing in aggressive rate cuts of over 100 basis points this year. In the past couple of weeks, however, rate cut expectations have become more moderate, dropping to 70bp.?

The British economy remains fragile and may force the BOE to pivot to a more dovish policy. British GDP data released on Thursday showed that the country has slipped into recession. Monthly GDP dropped by 0.1% in December, from a 0.2% growth in November, although market analysts were predicting an even larger drop by 0.2%. Preliminary quarterly GDP data revealed that the British economy contracted by 0.3% in the final quarter of 2023, against expectations of 0.1% contraction and 0.1% contraction in the third quarter of 2023. The British economy expanded by 0.3% in the first quarter of the year and 0.2% in the second quarter.?

British CPI data released on Wednesday showed that inflation in the UK was lower than expected. British headline inflation remained steady at 4.0% year-on-year in January, against expectations of a 4.1% print. Annual Core CPI, which excludes food and energy, grew at the same pace of 5.1% as December and November, against the 5.1% forecast.?

British inflation is expected to fall towards the BOE’s 2% goal in the coming months, relieving some of the pressure on the central bank to keep high interest rates. The announcement of the British CPI data on Wednesday increased expectations of BOE rate cuts, boosting the Sterling.

Upbeat British economic activity data provided support for the Sterling on Friday. British retail sales increased at their quickest pace of 3.4% in almost three years in January, against a 1.5% gain anticipated and a 3.3% dip in December.

Labor data released on Tuesday for the UK were also optimistic, boosting the Sterling. Claimant Count Change, which measures the change in the number of people claiming unemployment-related benefits in the UK, rose to 14.1K in January from 5.5K in December, which was lower, however, than the 15.2K anticipated. Average hourly earnings declined to 5.8% in the three months to December from a previous print of 6.7% but beat estimates of 5.6%. UK unemployment rate went down to 3.8 percent in the three months to December from 4.2% previously, against expectations of a 4.0% reading.?

TRADE GBP PAIRS

JPY

The Yen retreated to its lowest level in three months and Japanese government officials hinted at another intervention to support the currency.

USD/JPY edged higher last week, ending the week near the 150.1 level. If the USD/JPY pair declines, it may find support near 145.8. If the pair climbs, it may find resistance near 151.0.

The Yen gained strength towards the end of the week, even as the country fell into recession. Preliminary GDP data for the final quarter of the year showed that Japan's economy contracted by 0.1% against expectations of expansion by 0.2% and 0.7% contraction in the third quarter. The Japanese economy expanded by 1.2% in the second quarter of 2023, showing that the country’s economy is shrinking. Preliminary GDP Price Index data showed a 3.8% annual expansion in Q4 versus 5.0% in the previous quarter. This is a measure of inflation, which shows that inflationary pressures are dropping in Japan. Recession concerns and cooling inflation shrink the odds of a BOJ hawkish pivot in the coming months.

The Yen retreated to its lowest level in three months earlier in the week, causing alarm among Japanese government officials. Japan’s top currency diplomat, Masato Kanda, stated on Wednesday that the government is monitoring excessive movements in the value of the Yen and will move to thwart opportunistic short sellers of the currency, hinting at another intervention to support the currency. The BOJ has intervened at least twice in 2022 to support the Yen by selling dollars and buying Yen to support the country’s currency. Japanese Finance Minister Shunichi Suzuki also mentioned that he is paying close attention to rapid movements in the currency, emphasizing that it is important for currencies to move stably, reflecting fundamentals.

The BOJ kept all policy levers unchanged at its January meeting, maintaining its ultra-easy monetary policy. The BOJ has been keeping interest rates at a negative level, putting pressure on the Yen. The BOJ has so far maintained its dovish bias as other major central banks, and especially the Fed, have raised interest rates to high levels.?

BOJ Governor Kazuo Ueda has hinted at a policy shift down the road. Ueda stated that the likelihood of Japan sustainably achieving the bank's 2% inflation target was gradually increasing. Ueda has also stated that there is a high chance for easy monetary conditions to continue even after the central bank ends its negative interest rate policy.

An immediate policy shift is not expected yet, but markets are pricing in the first BOJ rate hike in April with over 50% probability. A rate hike by June is considered almost certain, with market odds giving over 90% probability of a shift in the BOJ’s monetary policy by June. Only a small rate hike of 10bps is considered likely, which would bring the BOJ’s interest level from negative to zero.?

Inflationary pressures are not sufficiently high in Japan to justify a shift to a more hawkish policy yet. National Core CPI data showed that Japanese inflation cooled further in December, with headline inflation at 2.3% year-on-year from a 2.5% print in November. Tokyo Core CPI also dropped to 1.6% in January from 2.1% in December.?

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Gold

Gold prices plummeted below the $1,990 level early last week for the first time since December, as the dollar gained strength.

Gold prices mirrored the dollar’s volatility last week. Gold prices plummeted below the $1,990 level early last week for the first time since December as the dollar gained strength. Gold prices rose above the key $2,000 level towards the end of the week as the US dollar and treasury yields weakened. If gold prices increase, resistance may be encountered near $2,065 per ounce, while if gold prices decline, support may be encountered near $1,984 per ounce.?

Gold prices have been predominantly directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar was volatile last week, with the dollar index surging to the 105 level mid-week, then dropping to the 104.3 level by the end of the week. US treasury yields were also volatile, with the US 10-year bond touching the 4.31% level mid-week, then retreating to approximately 4.28%.???????

US Headline inflation rose by 3.1% year-on-year in January from a 3.4% print in November against expectations of a much lower reading of 2.9%. Markets were anticipating a sharp drop in inflation in January, which was not realized, dashing expectations of early Fed rate cuts and putting pressure on gold prices. Monthly CPI rose by 0.3% in January, exceeding expectations of a 0.2% print. Core CPI, which excludes food and energy, rose by 0.4%, its higher monthly growth since June, against expectations of a 0.3% raise. Inflation in the US remains sticky and may put pressure on the Fed to keep interest rates at high levels for longer.?

The Fed kept interest rates unchanged at its latest monetary policy meeting within a target range of 5.25% to 5.50%. The Fed, however, has removed the tightening bias from its policy statement, indicating that the central bank is preparing to pivot to a less restrictive monetary policy, boosting gold prices.

Rate cut expectations have been fluctuating strongly in the past couple of weeks, affecting gold prices. Odds of a rate cut in March dropped to 7% after the release of the US inflation data from over 50% two weeks ago. Rate cut odds in May are also down to 30% from over 80% a few weeks ago. Market expectations of rate cuts are becoming more moderate as policymakers have stated that they intend to start reducing interest rates slowly.?

Gold prices are propped up by rising geopolitical tensions, which raise the appeal of safe-haven assets. Concerns that the Geopolitical crisis in the Gaza area may spread to neighboring countries are raising demand for safe-haven assets, boosting gold prices. The war between Israel and Hamas is threatening to spill over the Middle East as tensions rise in the Red Sea area, while the US and the UK have launched a coordinated action against Houthi rebels in Yemen.?

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Oil

The US Energy Information Administration reported an unexpectedly large rise in US crude stockpiles of 12.0M barrels for the week to February 9th.

Oil prices gained strength last week, with WTI price touching the $78.5 per barrel level. If WTI price declines, it may encounter support near $71.3 per barrel, while resistance may be found near $79.0 per barrel.

A sharp build in US oil inventories drove oil prices down on Wednesday. The US Energy Information Administration reported on Wednesday an unexpectedly large rise in US stockpiles. US crude stockpiles rose by 12.0M barrels for the week to February 9th, far exceeding expectations of a rise by 3.3M barrels and following another rise by 5.5M barrels the week before. Oil prices bounced back on Thursday, however, supported by a weaker dollar.?

Supply concerns also provide support for oil prices, as the crisis in the Gaza area threatens to disrupt oil distribution. Tensions around the Red Sea area have been rising, raising concerns that hostilities may spread in the Middle East, affecting oil supply and distribution. Iran-backed Houthi militants are attacking commercial vessels in the Red Sea, raising concerns about oil supply.?

Oil prices have been rising on reports of ongoing military involvement of the US in the Middle East. The US launched airstrikes the week before against Iranian forces in retaliation for drone strikes against US troops. In addition, reports that Israel rejected a ceasefire offer from Hamas reignited concerns about the crisis spreading in the region.

The US Energy Information Administration revised its oil output forecasts for this year lower to 170K barrels per day from the previous forecast of 290K, providing support for oil prices.

OPEC+ has decided to keep its oil output policy unchanged, maintaining the voluntary production cuts that have already been in place. The organization is enforcing substantial production cuts to keep oil prices high. The production cuts are limiting oil supply effectively, as OPEC oil output in January dropped by 410K barrels per day compared to December’s output.?

Oil prices are kept in check by a strong US dollar and high interest rates. The Fed kept interest rates unchanged at its latest policy meeting in January, within a target range of 5.25% to 5.50.?

US inflation surprised on the upside on Tuesday, boosting the dollar and putting pressure on oil prices. Headline inflation rose by 3.1% year-on-year in January from a 3.4% print in November against expectations of a much lower reading of 2.9%. Markets were anticipating a sharp drop in inflation in January, which was not realized, dashing expectations of early Fed rate cuts.

China’s poor economic outlook is increasing concerns of reduced oil demand, putting a lid on oil prices despite increasing geopolitical risks. Weak economic growth in China raises concerns about future demand, pushing oil prices down.?

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Cryptocurrencies

Bitcoin is gaining strength as the next Bitcoin halving event is expected on April 17th, raising the scarcity value of the cryptocurrency.

Most major cryptocurrencies have been on a bullish trend for the past couple of weeks. Bitcoin is in an uptrend, crossing major resistance levels, as bulls are prevailing and reaching their highest level since December 2021.?

Bitcoin price surged last week, attempting to break through the $52,000 level resistance over the weekend. If the BTC price declines, support can be found at $41,800, while further resistance may be encountered near $55,000.?

Ethereum price also extended gains last week, touching $2,890 during the weekend.? If Ethereum's price declines, it may encounter support near $2,470, while if it increases, resistance may be encountered near $3,000.

Bitcoin is gaining strength as the Bitcoin halving event is approaching. Every halving event cuts the rate at which new bitcoins are released into circulation in half, increasing the scarcity value of Bitcoin. The halving is scheduled approximately every four years, and the next Bitcoin halving event is expected on April 17th, raising the value of the cryptocurrency.

The approval of Bitcoin spot exchange-traded funds (ETFs) by the Securities and Exchange Commission (SEC) caused cryptocurrency prices to surge over the past few weeks. The SEC finally approved 11 applications boosting Bitcoin price.?

Cryptocurrency prices are affected by central banks’ interest rates. High-interest rates are putting pressure on risk assets, while the promise of rate cuts boosts crypto markets. The Fed kept interest rates unchanged at its latest meeting, within a target range of 5.25% to 5.50%. The Fed, however, has removed the tightening bias from its policy statement, indicating that the central bank is preparing to pivot to a less restrictive monetary policy.?

Markets are under pressure by increased risk-aversion sentiment caused by rising geopolitical tensions. Concerns that the Geopolitical crisis in the Gaza area may spread to neighboring countries drive risk sentiment down putting pressure on risk assets. The US and the UK have launched a coordinated action against Houthi rebels in Yemen.?

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