The upcoming week has been highly anticipated due to the number of central bank meetings taking place. We have the Fed, Bank of England and Bank of Japan giving their projections, monetary policy statement and announcing new benchmark interest rate. Out of the three, the Fed Chair Powell’s comments carry undoubtedly the most weight.
The question high on everyone’s agenda is on inflation expectations and commitment to Average Inflation Targeting now that Q2 annualized inflation expectation is 2.9% and 2.5% for the remainder of the year, according to NYT. Powell has previously commented that a short-lived spike in inflation can be expected due to base effects, fiscal and monetary stimulus. However, according to Powell the Fed does not see a sustained effect on inflation just yet. Inflation expectations have transmitted to credit markets with U.S. Treasury 10-year yield flirting with 1.6% levels, and the 2-year and the 10-year yield spread highest since 2015 at 1.43%. Whilst these yield levels are not high in historical context, a plethora of risk assets, such as U.S. technology stocks and emerging market currencies, have been under pressure once 10-year UST pierced 1.5%. Another inflation measure, the 10-year Treasury breakeven rate, touched 7-year high of 2.27%.
So, the Fed is tackling with a problem of overheating economy and heightened inflation expectations, while the labor market is still damaged. Around 6.2%, or 9.5 million Americans are still unemployed or underemployed, while labor force participation is weak at 61.4%. Definitely not the right time to cool the economy by rising interest rates. At the same time the market is pricing in increased inflation through credit markets which in turn affect other asset classes – undoubtedly a conundrum. The Fed might use another tool in its toolbox to contain the yield curve. Operation Twist, as it is called, involves the Fed buying U.S. government debt with different maturities, targeting to shape the yield curve. 10-year yield could potentially be forced lower by purchasing 10-year Treasury notes and selling those of shorter maturity to dampen the steepening pressure. What’s certain is that the Fed wants the markets to remain in order and is unlikely to cause a stir, unless the situation gets critical.
At the back of the inflationary pressures causing U.S. dollar lower and relatively higher interest rates bolstering the greenback, the dollar is consolidating. USD, measured by DXY, is consolidating near 91.8, after piercing 91.0 resistance level on the daily chart. Support level has formed near 91.6, while resistance can be found 91.8. Momentum indicators signal bullishness, although there is little conviction in the trend. 200-day moving average is well above the price, near 92.8. Among other majors, JPYUSD has pierced 200-day moving average resistance a month ago (and 200-period moving average on weekly chart) and now trading near 109.13, looking very bullish. USDCHF also just broke 200-day moving average resistance earlier in March, trading currently near 0.9275 and is seemingly marching higher.
S&P 500 and Russell 2000 closed at their highest last week, rising respectively 2.6% and 7.3%. Nasdaq 100 was under pressure but ended up closing 2.1% up. Oil gave up some of the gains, closing the week 1.0% lower while gold rose 1.4%. U.S. dollar, measured by DXY, shed 0.32%.
Have a great trading week ahead!