📆US CPI data at 12:30 pm GMT expected to show deceleration
Situation on the markets have calmed following a chaotic end of the previous week and a volatile launch of this week. While developments in the US banking sector are likely to continue to shape market movements in the coming days, easing of initial concerns allows investors to also pay attention to other factors, like for example today's US CPI reading for February scheduled for 12:30 pm GMT.
Economists expect quite a significant deceleration in headline US price growth, with inflation rate dropping from 6.4% YoY in January to 6.0% YoY in February. This reading will be key for shaping expectations ahead of next week's FOMC decision (March 22, 2023). Issues in the US banking sector have cast a shadow of doubt on the incoming decisions of the US central bank.
12:30 pm GMT - US, CPI inflation for February
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Headline. Expected: 6.0% YoY expected vs 6.4% YoY previously
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Core. Expected: 5.5% YoY expected vs 5.6% YoY previously
As recently as a week ago (after Powell's hearings in Congress), markets were pricing in a 50% chance of a 25 basis point rate hike and a 50% chance of a 50 basis point rate hike. Now, money markets pricing in around-70% chance of 25 basis point rate hike and around-30% chance of Fed keeping rates unchanged. Some institutions went even further with Nomura expecting a 25 basis point rate cut next week and announcement that QT is over! In our opinion such a decision would be an overkill given that US inflation remains significantly above Fed's target. Nevertheless, recent US banking sector issues make a 25 bp rate hike much more likely than a 50 bp move and the Fed is likely to send a cautious message next week. A pause cannot be ruled out entirely but spare for developments in the US banking sector, whose impact on the broader financial sector and economy remains unknown yet, there are little reasons to justify no change in the level of rates.
Money markets see only a 70% chance of a 25 basis point FOMC rate hike next week. Source: Bloomberg
EURUSD
US dollar took a hit during the recent US banking sector turmoil as US yields plunged and dragged USD lower along. Partial reversal of those moves can be observed today with short-term US yields climbing and the US dollar regaining some ground. Taking a look at the EURUSD chart at the H4 interval, we can see that the main currency pair broke above the 200-period moving average (purple line) at the beginning of this week and a retest of this moving average was made today. Bears failed to break below and some relief can be spotted in recent hours. Nevertheless, the zone around the aforementioned moving average also includes 1.07 handle and 38.2% retracement of the downward move launched at the beginning of February. A break above this zone and a demand-side reaction to the subsequent retest suggests that path of least resistance may be leading higher.
EURUSD at H4 interval. Source: xStation5
