CFD Markets News and Forecasts — 16-03-2022

February month employment statistics from the Australian Bureau of Statistics, up for publishing at 00:30 GMT on Thursday, will be the immediate catalyst for the AUD/USD pair traders. Along with the data, the RBA Bulletin for Q4 will also be released and should be watched too.

The jobs figures have been important considering the recent run-up in inflation and the Reserve Bank of Australia’s (RBA) slightly easy hesitance to rate-hike. It should be noted, however, that the recently mixed signals from the Aussie central bank and more importance to the risk catalysts dim the charm of today’s Aussie jobs report.

Market consensus suggests that the headline Unemployment Rate may ease to 4.1% from 4.2% on a seasonally adjusted basis whereas Employment Change could rise from 12.9K to 37K. Further, the Participation Rate may also rise to 66.3% from 66.2% during the stated month.

Ahead of the event, analysts at Westpac said,

ANZ also mentioned,

How could the data affect AUD/USD?

AUD/USD bulls take a breather around a one-week high near 0.7285, after rising for the last two consecutive days, during Thursday morning in Asia. In doing so, the risk barometer portrays the market’s indecision over the Russia-Ukraine peace talks ahead of the key data release.

Although expectations of firmer data may offer immediate strength to the AUD/USD prices, the quote needs support from the market sentiment to recall the buyers, due to the recent emphasis on risk catalysts. Another reason that weighs on the importance of the Aussie jobs report is the RBA’s latest Minutes repeating its no rate-hike pledge, as well as higher importance to inflation concerns.

Technically, the weekly resistance line challenges the AUD/USD pair’s immediate upside around 0.7300, a break of which will quickly propel the quote towards the 0.7370 level. Adding to the upside filter is the 200-DMA level surrounding 0.7305.

Key Notes

AUD/USD bulls on standby for Aussie Employment data

 Australian Employment Preview: Upbeat figures to fuel the optimism-related rally

About the Employment Change

The Employment Change released by the Australian Bureau of Statistics is a measure of the change in the number of employed people in Australia. Generally speaking, a rise in this indicator has positive implications for consumer spending which stimulates economic growth. Therefore, a high reading is seen as positive (or bullish) for the AUD, while a low reading is seen as negative (or bearish).

About the Unemployment Rate

The Unemployment Rate released by the Australian Bureau of Statistics is the number of unemployed workers divided by the total civilian labor force. If the rate hikes, indicates a lack of expansion within the Australian labor market. As a result, a rise leads to weaken the Australian economy. A decrease of the figure is seen as positive (or bullish) for the AUD, while an increase is seen as negative (or bearish).

• The DXY pauses around 98.40 posts in-line interest rate decision by the Fed.
• Seven interest rate hikes are announced for 2022 to contain the inflation mess.
• The monetary policies of BOJ and BOE will be keenly watched this week.

The US dollar index (DXY) has witnessed some long liquidation after the Federal Reserve (Fed) announced an interest rate hike by 25 basis points (bps) to curtail the soaring inflation. The decision was in-line with the estimates, which brought a temporary pause in a firmer rally by the DXY.

Fed's interest rate bulletin

A rate hike of 25 bps received a green flag from seven out of eight monetary policy committee (MPC) members as St. Louis Fed President Jim Bullard was in favor of a 50 bps rate hike this time. It is worth noting that the Fed has increased its interest rates after a span of three years. Although a 25 bps hike interest rate decision was in-line with the estimates, the announcement of seven hikes in 2022 has surprised the market. The aggressive tightening bulletin claims that the inflation mess is much worse than the estimated, which is why the Fed is looking to elevate the interest rates quickly.

US Retail Sales

The underperformance of US Retail Sales for February month has mounted concerns over the US economy going forward. The US Census Bureau reported February Retail Sales at 0.3% lower than the market consensus of 0.4% and much lower than the previous figure of 4.9%.

Major events this week: Building Permits, Housing Starts, Initial Jobless Claims, Industrial Production, and Existing Home Sales.

Eminent issues on the back boiler: Russia-Ukraine peace talks, monetary policy from Bank of England (BOE) and Bank of Japan (BOJ), Federal Reserve Bank Gov. Michelle Bowman speech.

• USD/CAD consolidates recent losses around two-week low, grinds lower of late.
• Bearish MACD signals, key DMAs challenge buyers, 1.2880-90 is the key hurdle.
• Two-month-old support line, 200-DMA adds to the downside filters.

USD/CAD bears take a breather around a fortnight low while making rounds to 1.2680-85 during Thursday’s Asian session.

In doing so, the Loonie pair snaps a two-day downtrend to recover from a multi-day bottom. However, a convergence of the 100-DMA and the 50-DMA challenge the quote’s immediate upside, around 1.2685-90, amid bearish MACD signals.

Even if the USD/CAD prices manage to rally past 1.2690, multiple resistance levels near the 1.2800 threshold and a three-month-old horizontal area surrounding 1.2880-90 will challenge the pair’s further advances.

Following that, a free run-up towards the 1.3000 psychological magnet can’t be ruled out.

On the flip side, an upward sloping support line from January 20, near 1.2630 by the press time, lures the USD/CAD bears.

Should the quote drops below 1.2630, the 200-DMA and a five-month-long rising trend line, respectively around 1.2600 and 1.2555, will be in focus.

USD/CAD: Daily chart

Trend: Further weakness expected

• WTI crude oil prices pick up bids to pare recent losses around three-week low.
• Risk-on mood battles bearish EIA inventories, IEA demand forecasts to portray lackluster moves.
• Ukraine, China headlines become more important for immediate directions.

WTI crude oil prices stay in the recovery mode, despite being sluggish at around $94.55 during Thursday’s initial Asian session.

The black gold offered a choppy end to Wednesday, following a volatile day, amid mixed catalysts concerning the risk sentiment and energy market.

On the positive side, Ukraine praises the softness of Russian diplomats’ voice and the International Court of Justice in The Hague also ordered Moscow to abandon the Ukraine invasion, which in turn favors risk-on mood.

Also favoring the risk-on mood is a softer COVID-19 daily count from China, as well as headlines suggesting the government’s readiness to propel economic growth, by China Vice Premier Liu He.

Elsewhere, weekly inventory data from the US Energy Information Administration (EIA), 4.345M versus -1.375M expected and -1.863M prior, challenged oil buyers. Additionally weighing the energy prices is the International Energy Agency’s (IEA) lowering of the Q2-Q4 2022 forecast for world oil demand, by 1.3 million BPD amidst the Ukraine crisis.

That said, WTI crude oil prices also get hammered by the Fed’s hawkish rate-hike, even if Chairman Jerome Powell couldn’t lift the greenback.

Moving on, risk catalysts are likely to entertain WTI crude oil buyers with China and Ukraine news being the major ones.

Technical analysis

50-DMA and a one-week-old previous resistance line, respectively around $92.20 and $90.45, restrict the short-term downside of the black gold whereas the recovery moves need to cross the last Friday’s swing high near $107.00 to regain the buyer’s confidence.

• Aussie bulls are firmer post the breakout of an ascending triangle.
• The asset holds above 20 and 200-period EMAs, which adds to the upside filters.
• Bears can dictate levels if the asset slip below 84.60.

The AUD/JPY pair is auctioning above its three-year-old resistance at 86.70. The cross has formed a positive open drive session on Thursday as the aussie bulls witnessed carry-forward buying right from the first tick of the trading session.

On a weekly scale, AUD/JPY has given a breakout of an ascending triangle that signals a slippage in the standard deviation and indicates a balanced auction but with a positive bias. The upper end of the ascending triangle was marked from 14 May 2021 high at 85.80 while the lower end was placed from 30 October 2020 low at 73.14.

The 20-period and 200-period Exponential Moving Averages (EMA) at 83.16 and 80.36 respectively are scaling higher, which adds to the upside filters.

The Relative Strength Index (RSI) (14) has breached 60.00 from below, showing no signs of divergence and overbought. Holding above 60.00 levels indicates a bullish setup going forward.

For more upside, bulls need to violate Thursday’s high at 86.74, which will send the pair towards 9 February 2018 high at 87.51, followed by the round level at 88.00.

On the contrary, bulls can lose their control if the cross slips below March 15 low at 84.60, which will drag the pair to March 8 low at 83.80. Breach of the latter will send the cross to the round level at 83.00.

AUD/JPY weekly chart

• The EUR/JPY continues gaining in the week, up some 2.42%.
• Risk-sensitive peers appreciate while safe-haven weakened.
• EUR/JPY Price Forecast: Neutral upward, above 131.00, but downside risks remain.

The EUR/JPY extends its weekly gains on the back of the improved market sentiment, courtesy of progress in talks between Russia-Ukraine, despite the US central bank hiking rates for the first time since 2018. At the time of writing, the EUR/JPY is trading at 131.06.

US equity indices reflected the market mood, finishing Wednesday’s trading session with gains. In the FX space, safe-haven peers depreciated, led by the Japanese yen, while the greenback ended on the backfoot, as measured by the US Dollar Index (DXY), losing 0.70%, sitting at 98.40,

In the bond market, global bond yields were mixed, while US Treasury yields ended mixed, led by the short-term of the curve. The 10-year T-note rose three basis points and sat at 2.192%.

Aside from that, the EUR/JPY overnight traded within a 150-pip range, opening around 129.52, but reaching the daily high above 131.00, after the Fed’s monetary policy decision.

EUR/JPY Price Forecast: Technical outlook

The EUR/JPY is neutral upward biased, though short of the 78.6% Fibonacci retracement, which sits around 131.27, a level that could witness some selling pressure, based on the steeper move in the week, so far up 2.42%. Oscillator-based, the Relative Strenght Index (RSI) sits at 59, slightly aiming horizontal, meaning that the pair might consolidate before resuming to the upside.

That said, the EUR/JPY first resistance level would be 131.27. Breach of the latter, the following resistance would be 132.00, followed by 133.00. On the flip side, the first support would be the confluence of the 200-day moving average (DMA) at 129.98 and the 130.00 mark. A decisive break would expose the 50-DMA at 129.68, followed by the 129.00 mark.

“Russia has an advantage in the air; I hope for the allies' assistance,” Ukrainian President Volodymyr Zelenskyy said during early Thursday morning in Asia.

More comments

Elsewhere, the UK’s Ministry of Defense (MoD) came out with their latest Defence Intelligence update suggesting that Russia is resorting to the use of older, less precise weapons, which are less military effective and more likely to result in civilian casualties.

FX implications

The news is concerning a challenge to the previous risk-on mood. However, the S&P 500 Futures remain mildly bid by, up 0.10% around 4,362 by the press time.

Read: Forex Today: Fed, war and inflation not enough to take down Wall Street

• Silver prices struggle to extend the bounce off two-week low.
• 100-SMA, previous support line from early February and weekly resistance line highlight $25.20 as the key hurdle.
• 50% Fibonacci retracement level, 200-SMA adds to the downside filters.

Silver (XAG/USD) prices fail to carry the bounce off a fortnight low, taking rounds to $25.00 during the initial Asian session on Thursday.

The bright metal’s rebound from the 50% Fibonacci retracement (Fibo.) of February-March upside, near $24.45, fades near the $25.20 resistance confluence, including the 100-SMA, a three-week-old support-turned-resistance and descending trend line from the previous Tuesday.

It should be noted, however, that the rebound in MACD signals keeps XAG/USD buyers hopeful to overcome the key hurdle to the north.

Following that, a run-up towards the $26.00 threshold and the monthly high of $26.95 becomes imminent.

However, silver’s upside past $26.95 depends upon how well it can stay beyond the $27.00 threshold.

Alternatively, pullback moves may retest the 50% Fibo. level of $24.45 before the 200-SMA, around $24.20, restricts XAG/USD downside.

Also acting as a short-term downside filter is the mid-February’s high near the $24.00 round figure and the 61.8% Fibonacci retracement level of $23.88.

Silver: Four-hour chart

Trend: Further recovery expected

• Antipodean bulls are firmer above 20-period EMA.
• The RSI (14) has surpassed 60.00, showing no signs of divergence and overbought.
• The kiwi is underpinned against the greenback after a pullback near 0.6820.

The NZD/USD is inching higher after hitting a low of 0.6767 as the demand for the risk-sensitive assets have jumped sharply. The major has printed a fresh weekly high at 0.6844 and is expected to continue its strength going forward.

On a four-hour scale, NZD/USD is auctioning in a rising channel in which the market participants consider pullbacks towards the lower end as a buying opportunity. The upper end of the rising channel is placed from February 4 high at 0.6684 and the lower end is marked from January 28 low at 0.6529. The major has sensed support near the 200-period Exponential Moving Average (EMA) at around 0.6760. The asset has breached the trendline placed from March 7 high at 0.6926.

The pair is comfortable holding above the 20-period EMA at 0.6797, which adds to the upside filters.

The Relative Strength Index (RSI) (14) has breached 60.00 from below, showing no signs of divergence and overbought. Holding above 60.00 levels indicates a bullish setup going forward.

Now, the kiwi bulls will find significant bids near pullback at the above-mentioned trendline around 0.6820. A successful test of the trendline will drive the pair higher towards March 10 high at 0.6876, which will be followed by March 7 high at 0.6926.

On the flip side, bears can dictate levels if the pair slip below February 22’s average traded price at 0.6718 decisively, which will drag the major to February 27 low at 0.6664. Breach of the latter will drag the asset towards February 24 low at 0.6630.

NZD/USD hourly chart

• AUD/USD is holding firm in bullish territory, awaiting today's Employment data.
• The Fed was a disappointment for the US dollar bulls.

AUD/USD is starting out the day in Asian markets on the front foot due to in part comments from a senior Chinese official that boosted hopes for more stimulus, as well as following a mixed Federal Reserve outcome on Wednesday. The Aussie is sat at 0.7288 as traders await today's Employment data for Australia. 

On Wednesday, Xinhua news agency cited Vice Premier Liu He said China will roll out policy steps favourable for its capital markets. This was already offering to support the Aussie until the US dollar rallied in the New York trade after the US Federal Reserve moved to a hawkish monetary policy. However, the bid was shortlived when the Fed was not delivering a firmer rhetoric in the presser.

The fEd hiked by 25 basis points and the statement showed that most Fed officials see as many as seven rate increases in 2022. The Fed explained that the economic activity and employment indicators have continued to gain strength, jobs gains have been sold in recent months, and the unemployment rate has fallen notably.

"The committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run," the FOMC said. "With appropriate firming in the stance of monetary policy, the committee expects inflation to return to its 2 percent objective and the labor market to remain strong," it added.

Separately, the Fed's dot is also pointing to a consensus funds rate of 1.9% by the end of this year. It sees three more increases in 2023 and then none the following year, pencilling in rate hikes at every remaining meeting this year. 

However, the hawkishness was erased in comments during the Fed chairman's presser. Jerome Powell said rate rises will depend on inflation and economic data. He has stated that the Fed is looking for the month on month inflation to come down.

For the day ahead, the  Australian labour market data for February are released at 11:30am. ''We expect to see the unemployment rate drop to 3.9% (4.2% previously), led by a 50k lift in employment.

We’ve already seen a surge in Australian job ads in the wake of the disruption caused by the Omicron outbreak – and it’s looking like the labour market should be able to shake off its impacts pretty quickly,'' analysts at ANZ Bank said.

• AUD/NZD extends recovery from two-month low on softer-than-expected NZ Q4 GDP.
• New Zealand GDP reversed previous contractions but missed upbeat forecasts.
• Ukraine-Russia headlines, China news propel risk-on mood even as Fed hikes rate by 0.25%.
• Australian employment data for February, risk catalysts will be important for fresh impulse.

AUD/NZD justifies New Zealand’s Q4 GDP miss while extending the previous day’s rebound towards 1.0700, around 1.0680 during the early Thursday morning in Asia. The reason for the pair’s latest strength could be linked to the market’s optimism of overcoming the Ukraine-Russia crisis, as well as easing covid fears from China.

New Zealand’s (NZ) fourth quarter (Q4) GDP came in 3.0% and 3.1% QoQ and YoY while reversing the previous contraction of -3.7% and -0.3% respectively. However, market forecasts were too upbeat, 3.2% for the quarter and 3.3% for yearly print, which in turn dented the New Zealand dollar.

Read: New Zealand GDP rebounds but fails to lift NZD

ANZ also raised bars for the AUD/NZD prices as it predicted before the data, “Unfortunately, the prospects for further strong GDP prints over the first half of 2022 in particular are looking weaker by the minute.”

On a different page, progress on the Ukraine-Russia peace talks isn’t clear even as Moscow cheers the nearness of an agreement including ceasefire and withdrawal of Russian troops. However, Ukraine praises the softness of Russian diplomats’ voice and the International Court of Justice in The Hague also ordered Moscow to abandon the Ukraine invasion, which in turn favors risk-on mood.

Elsewhere, a softer COVID-19 daily count from China tames virus woes from the dragon nation and adds to the upbeat sentiment. On the same line were headlines suggesting the government’s readiness to propel economic growth, by China Vice Premier Liu He.

That said, Wall Street portrayed a risk-on mood and the US 10-year Treasury yields gained 2.0% on Wednesday to refresh the highest level since 2019 as the Fed hiked benchmark rate by 0.25% and signaled more.

Looking forward, Australia’s employment data for February will be important for AUD/NZD prices. Forecasts suggest that the headline Unemployment Rate may ease to 4.1% from 4.2% on a seasonally adjusted basis whereas Employment Change could rise from 12.9K to 37K. Along with the data, the RBA Bulletin for Q4 will also be released and should be watched too. However, major attention will be given to risk catalysts as the Reserve Bank of Australia (RBA) is more concerned with the inflation of late.

Read: Australian Employment Preview: Upbeat figures to fuel the optimism-related rally

Technical analysis

A two-week-old descending trend line around 1.0685 holds the key to the further upside of the AUD/NZD prices.

The Gross Domestic Product (GDP), released by Statistics New Zealand arrived as +3.0% for the quarter (vs. expected 3.2%).

For the year, it came in at Q4 3.1% vs the estimated 3.3% vs the previous -0.3%.

NZD/USD is steady on the outcome as a rebound was widely expected.

More to come...

About NZD GDP

The Gross Domestic Product (GDP), released by Statistics New Zealand, highlights the overall economic performance on a quarterly basis. The gauge has a significant influence on the Reserve Bank of New Zealand’s (RBNZ) monetary policy decision, in turn affecting the New Zealand dollar. A rise in the GDP rate signifies improvement in the economic conditions, which calls for tighter monetary policy, while a drop suggests deterioration in the activity. An above-forecast GDP reading is seen as NZD bullish.

• GBP/USD rallies to 1.3147 highs post Fed and market's turnaround. 
• Bulls back in control despite Fed's hawkish statement. 

GBP/USD is up over 0.8% at the time of writing in the aftermath of the Federal Reserve that had something for both the bulls and the bears from start to finish. Initially, the US dollar rallied on the rate decision and statement. GBP/USD dropped to 1.3042 after the Fed announced it had hiked 25 basis points in the Federal Funds Rate. 

In the statement, it read that "inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.'' The Fed statement also noted that the Ukraine war could lead to higher inflation and slower Gross Domestic Product.

Most Fed officials see as many as seven rate increases in 2022. The Fed explained that the economic activity and employment indicators have continued to gain strength, jobs gains have been sold in recent months, and the unemployment rate has fallen notably.

"The committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run," the FOMC said. "With appropriate firming in the stance of monetary policy, the committee expects inflation to return to its 2 percent objective and the labor market to remain strong," it added.

Separately, the Fed's dot is also pointing to a consensus funds rate of 1.9% by the end of this year. It sees three more increases in 2023 and then none the following year, pencilling in rate hikes at every remaining meeting this year. 

However, the hawkishness was erased in comments during the Fed chairman's presser. Jerome Powell said rate rises will depend on inflation and economic data. He has stated that the Fed is looking for the month on month inflation to come down. This helped US stocks to rebound and weighed on the greenback, lifting cable higher again.

• Despite the more hawkish than expected Fed, EUR/USD rallied and is at session highs in the 1.1030s.
• The Fed signaled rate hikes at every remaining meeting this year and four more in 2023, pushing US yields higher.
• But it was risk-on after Powell’s presser and a rally in equities weighed on USD demand.

Though most analysts, economists and commentators were unanimous in their agreement that the latest Fed policy announcement and round of the remarks from Fed Chair Jerome Powell was far more hawkish than expected, markets do not seem to have gotten the memo. The central bank hiked interest rates as expected, with the surprise coming in the new dot-plots, which showed that the median expectation of Fed members is for 25bps rate hikes at all of this year's remaining meetings (i.e. another six), followed by a further four in 2023. That means the Federal Funds rate reaching 1.75-2.0% by the end of 2022 and 2.75-3.0% by the end of 2.23.

Powell’s remarks were suitably hawkish to match the new interest rate guidance and even though this sent US yields higher across the curve, that was not enough to trigger a lasting rally in the US dollar. After dipping as low as the 1.0950s in the immediate aftermath of the Fed’s initial policy announcement, EUR/USD has now been able to recover all the way back to the 1.1030s, where it trades higher by about 0.7% on the day and is eyeing a test of last week’s highs to the north of 1.1100.

Analysts were at a loss to explain why the dollar could hold onto its initial post-Fed announcement gains. It could have something to do with equities rallying in wake of Powell’s press conference, thus reducing the demand for safe-haven currencies like the buck. Again, analysts weren't sure why US equities would rally on a more hawkish Fed. It could be because equity market investors deem the Fed’s hawkish shift on Wednesday as appropriate and necessary. If so, gone are the days where equity investors crave a dovish Fed no matter what.

In the current environment of high inflation, perhaps equity investors are taking the view that its better for long-term earnings if the Fed lifts interest rates and brings back price stability than keeping interest rates lower. Either way, if this is the new mindset, that means equity market downside as a result of Fed hawkishness might be more limited going forward, meaning lesser demand for the safe-haven dollar. However, the dollar still stands to benefit from widening rate differentials versus its G10 peers, so it seems unlikely that Wednesday’s rally would be the start of a more sustained move higher. A retest of recent lows around 1.0800 seems more likely that a recovery back above 1.1200 at this point.

• In the North American session, the Swiss franc gains vs. the greenback, up some 0.06%.
• The Fed projects the Federal Funds Rate at 1.9% by the end of 2022.
• USD/CHF Price Forecast: Above 0.9373, the bias is upwards; otherwise, a move downwards is on the cards.

The USD/CHF snaps four consecutive days of gains, down 0.12%, in the North American session, as the Federal Reserve hiked rates 25 basis points, from 0.25% to 0.50%, amid a risk-on market mood. The USD/CHF slides from 0.9472 to 0.9401 at the time of writing.

Following the Federal Reserve’s first rate hike in three years, the financial market mood stays positive. US equity indices recovered from losses at the headline and following Fed’s Chief Jerome Powell presser, which appeared to be more dovish than the statement.

The greenback remains soft, losing almost 0.80% in the session, sitting at 98.36, while US Treasury yields are practically flat, with the 10-year T-benchmark note at 2.217%, after reaching 2.246%.

Summary of remarks of Fed monetary policy statement

The Federal Reserve stated that inflationary pressures remain high, caused by supply difficulties, the Covid-19 pandemic, and high oil and energy prices. Furthermore, the Russia-Ukraine conflict spurred a steeper move in oil, and Fed policymakers commented that the implications of the conflict are highly uncertain and would create additional upward pressure on inflation.

That said, policymakers worried about the actual scenario signaled the necessity of rate hikes to tame inflation, as reflected by the dot-plot, where Fed Governors expect at least seven increases to the Federal Funds Rate this year as the median forecasts rates to end around 1.90% in 2022.

Labor market-wise, Fed members foresaw the unemployment rate would hit 3.5% by 2022 and 2023. Regarding the balance sheet reduction, also known as Quantitative Tightening (QT), officials would expect to begin reducing it at a coming meeting.

USD/CHF Price Forecast: Technical outlook

Overnight, the USD/CHF seesawed around the 0.9400 area, ahead of the Federal Reserve meeting. However, once Fed’s monetary policy decision crossed the wires, the pair moved, with the USD/CHF appreciating and reaching a new YTD high at 0.9460, retracing afterward to pre-Fed levels.

The USD/CHF bias is upwards, though downside risks remain unless USD/CHF bulls hold their reins above the November 24, 2021, high at 0.9373, previous resistance-turned-support. In that event, March 15 high at 0.9431 would be the first resistance, followed by April 1, 2021, high at 0.9472, which would expose the 0.9500 mark once cleared.

On the flip side, the USD/CHF first support would be 0.9400. Breach of the latter would expose 0.9373, followed by January 31 resistance-turned-support at 0.9343 and the 0.9300 psychological level.

What you need to take care of on Thursday, March 17:

The American dollar ended the day lower after the US Federal Reserve monetary policy decision. The US central bank hiked rates by 25 bps, as expected, with Bullard being the only dissenter voting for a 50 bps hike. However, the dot-plot now indicates six rate hikes for the year, while Fed officials see the Fed Funds rate at a median of 1.9% at the end of this year and 2.8% at the end of 2024.

Stocks initially fell with the announcement but quickly recovered as chief Jerome Powell sounded optimistic about the economic progress and convinced market participants that the central bank is in control of the situation.

Meanwhile, there has been no real progress in Ukrainian and Russian peace talks. Moscow said they made “significant progress”  towards a 15-point peace plan that would include a ceasefire and Russian withdrawal from Ukraine if Kyiv declares neutrality and accepts limits on its military forces. However, Kyiv rejected the proposed neutrality. Also, the International Court of Justice in The Hague ordered Russia to suspend the invasion of Ukraine.

Financial markets remained optimistic, with most global indexes closing in the green. All of the US indexes closed with gains, with the Nasdaq Composite being the best performer by adding over 3%.

US government bond yields continued to pressure the upside. The yield on the 10-year Treasury note peaked at 2.246% to later settle at 2.16%.

The EUR/USD pair reached fresh weekly highs in the 1.1040 price zone, while GBP/USD extended its recovery to 1.3155. Meanwhile, the AUD/USD pair flirts with 0.7300 while USD/CAD plunged to 1.2690.

The USD/JPY pair hit a fresh multi-year high of 119.11 before retreating towards the current 118.60 price zone.

Gold posted a nice comeback after dipping to $1,895 a troy ounce, now trading at around $1,929.40. Crude oil prices, on the other hand, remained under pressure, and WTI settled just below $95 a barrel. 

• US stocks rebound in the Fed aftermath, S&P500 is 1.5% in the green.
• Ukraine/Russia peace talk hopes gain traction in global financial markets. 

The S&P 500 is in the green by some 1.6% at the time of writing and after the volatility surrounding the Federal Reserve that on Wednesday raised its benchmark lending rate for the first time since 2018, citing continued inflation pressures and saying the economic outlook remains "highly uncertain" amid the ongoing war between Russia and Ukraine.

By 19:40 GMT, the S&P 500 was ar 4,328 and had travelled between a low of 4,251.99 and a high of 4,347.06. The US central bank increased the federal funds rate to a range of 0.25% to 0.5% from its prior range of zero to 0.25%. This was in line with the market consensus. However, the statement and dots were more hawkish than expected which initially drive down prices on Wall Street.

"Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures," the bank's Federal Open Market Committee said in a statement after its two-day meeting. The Fed statement noted that the Ukraine war could lead to higher inflation and slower Gross Domestic Product.

It also stated that most Fed officials see as many as seven rate increases in 2022. The Fed explained that the economic activity and employment indicators have continued to gain strength, jobs gains have been sold in recent months, and the unemployment rate has fallen notably.

"The committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run," the FOMC said. "With appropriate firming in the stance of monetary policy, the committee expects inflation to return to its 2 percent objective and the labor market to remain strong," it added.

Separately,  the Fed’s dot plot is pencilling in rate hikes at every remaining meeting this year, pointing to a consensus funds rate of 1.9% by the end of this year. It sees three more increases in 2023 and then none the following year. 

The committee members also raised their inflation estimates, expecting the personal consumption expenditures price index excluding food and energy to reflect 4.1% growth in 2022, compared to December's 2.7% projection. Core PCE is expected to be 2.6% and 2.3%, respectively, in the next two years before settling to 2% over the longer term.

However, during the Fed chairman's presser, Jerome Powell said rate rises will depend on inflation and economic data. He has stated that the Fed is looking for the month on month inflation to come down, pouring dovish water on what was a more hawkish statement. This helped US stocks rebound ad fall back in line with the broader relief rallies pertaining to hopes of peace talks between Ukraine and Russia. 

Ukraine / Russia peace talk momentum shines 

Earlier in the day, Russia's foreign minister, Sergei Lavrov, said some formulations of agreements with Ukraine were close to being agreed upon. Moscow added that the two sides had been discussing status for Ukraine similar to that of Austria or Sweeden, meaning being members of the European Union but staying neutral and outside the NATO military alliance.

Ukraine's chief negotiator said it would give Kyiv binding international security guarantees to prevent future attacks. Ukrainian President Volodymyr Zelensky crosse the worse and explained that the peace talks between Russia and Ukraine were sounding more realistic. However, he added that more time was needed, as Russian airstrikes killed five people in the capital Kyiv and the refugee tally from Moscow's invasion reached 3 million.

Fed Chair Jerome Powell said in his post-FOMC meeting press conference on Wednesday that the Fed will move interest rates higher as quickly as it practically can and will move rates beyond the neutral rate if required. We will not let high inflation become entrenched, he said. 

Additional remarks:

"Nothing in our framework has caused us to wait longer than we would have."

"You can't blame the framework, it was a sudden burst of inflation."

"The labor market has a lot of momentum and the underlying economy is strong."

"I expected bottlenecks to get better, but they haven't."

"The goal is to restore price stability and sustain a strong labor market."

"Price stability is an essential goal."

"Price stability is a pre-condition for a strong labor market."

"The economy can handle tighter monetary policy."

"We are fully committed to bringing inflation back down."

"High inflation takes a toll on everyone."

"We anticipate inflation will move back down."

"I expect demand to slow enough to better match supply."

"Our plan is to bring inflation down over time."

"We are strongly committed to not allow high inflation to become entrenched."

"The way we do that is by raising interest rates and shrinking the balance sheet."

"The good news is that the economy and labor market is quite strong, can handle interest rate increases."

"We believe our policy is the appropriate one."

"Sanctions are the business of elected officials."

"Wages moving up is a great thing."

"Wage increases are well above what's consistent with 2% inflation over time."

"We don't see an entrenched wage-price spiral."

"I don't see too-high wage increases becoming entrenched."

"There is a misalignment of supply and demand in labor market."

"We need to use our tools to guide inflation back down to 2%."

"We think the labor market can handle tighter monetary policy."

"Wages are moving up faster than what is consistent with 2% inflation."

"Current wage growth isn't sustainable."

"We do expect people to come back into the labor market."

"We expect people will come back to the labor market as Covid-19 becomes less of a factor."

"In hindsight, it would have been appropriate to move earlier, if we knew then what we know now."

"The committee is very focused on using tools."

"No one wants to have to put restrictive policy to bring inflation down."

• The Federal Reserve hiked rates 25 bps as widely expected, the US dollar strengthened.
• The USD/CAD reacted violently, reaching 1.2777, today’s daily high.
• FOMC voted 8-1 with St. Louis Fed President Bullard favoring a 50 bps hike.

USD/CAD reached a new daily high after the US central bank raised the benchmark interest rate by 25 basis points, as widely estimated, the first hike since December of 2018. As Fed’s Chair Powell speaks, the USD/]CAD is trading at 1.2716.

USD/CAD Market’s reaction

The Loonie weakened severely, reacting upwards and printing a daily high at 1.2777

The British pound dropped from nearly 1.3100 towards 1.3070s once the headline crossed the wires, while the US 10-year Treasury note yield rose to 2.212%, the highest since May 2019.

Summary of remarks of Fed monetary policy statement

Overall, the Fed noted that inflationary pressures remain high courtesy of supply difficulties, the pandemic, increasing energy prices, and broadening inflationary pressures. Additionally, policymakers commented that the implications of the Russian war are “highly uncertain” for the US economy and would likely create additional upward pressure on inflation and weigh on economic activity. Also, Fed officials have signaled the necessity of hiking rates to tame inflation, which was confirmed by the dot-plot, in which the board members forecast at least seven hikes in 2022.

Meanwhile, Fed money market futures are pricing in a 50% chance of a 50 bps rate hike on the May 4 meeting, while the US 10-year T-note yield retreats from daily highs around 2.246% to 2.183%.

Labor market-wise, Fed members forecast the unemployment rate would hit 3.5% by the end of 2022 and 2023. Concerning the reduction of the balance sheet, also known as Quantitative Tightening (QT), officials would expect to begin reducing it at a coming meeting. The Fed added that they would adjust monetary policy stance as appropriate if risks emerge, which could impede the central bank goals.

USD/CAD Price Forecast: Technical outlook

Once the Federal Reserve monetary policy decision is on the rearview mirror, the USD/CAD extends its fall, approaching the 1.2700 mark. In fact, the daily high reached post-Fed, pierced the 38.2% Fibonacci level, though at press time is looking for a re-test of the 50% Fibonacci retracement at 1.2706.

The USD/CAD is upward biased. However, the 1-hour chart shows that the USD/CAD is downward biased in the near term, with hourly simple moving averages (SMAs) above the exchange rate. The USD/CAD first support would be 1.2706, the 50% Fibonacci level. Once cleared, the next support would be the 61.8% Fibonacci at 1.2654, followed by 1.2636, February 10 daily low.

• The dollar hits fresh 7-year highs beyond 119.00 after Fed's hike.
• The Federal Reserve raises rates to 0.5% and hints at six more hikes.
• USD/JPY seen rallying towards 122.90/123.00 – Credit Suisse.

The US dollar has jumped about 0.5% against the Japanese yen to hit fresh long-term highs above 119.00 after the Federal Reserve announced its decision to hike interest rates.

Fed’s rate hike pushes the US dollar higher

The greenback has extended its recent rally, pushing an already battered yen to hit fresh seven-year lows at 119.10.

The Federal Reserve has confirmed market expectations increasing the Federal Funds Rate by 25 basis points to 0.50% for the first time since 2018.

Furthermore, the bank has hinted at seven rate hikes in 2022, which would mean one at each remaining monetary policy meeting.

The Monetary Policy Committee notes that supply difficulties and the consequences of the COVID-19 pandemic have pushed inflation to its highest levels in the last four decades and that Ukraine’s invasion is highly likely to increase inflationary pressures and weigh on economic activity.

The rate hike has been approved by 8 votes to 1 with the dissenting voice of the St. Louis Fed President James Bullard, who wanted a 50-basis-point hike.

USD/JPY seen appreciating to 122.90/123.00 area – Credit Suisse

On a longer-term perspective, FX Analysts at Credit Suisse see further room for USD appreciation: “We maintain our long-held bullish outlook with resistance seen next at the 2018 highs at 118.61/66 and with 122.90/123.00 still our ultimate objective (…) Support at 116.35/10 now ideally holds, although only a close back below the 55-day average at 115.24 would warn of a ‘false’ break higher.”

Technical  levels to watch

Fed Chair Jerome Powell, in his post-FOMC meeting press conference on Wednesday, said that the committee made excellent progress on their balance sheet reduction plan which could be finalised at the next meeting. 

Additional remarks:

"By end of this year, policymakers are broadly at, or above, their estimates of the neutral rate."

"Balance sheet reduction also adds tightening."

"Wage increases are expected to move back down."

"We want to slow demand to get it into better alignment with supply to bring down inflation."

"We are prepared to use our tools as needed to restore price stability."

"It's a really attractive labor market for people, we hope that will lead to more labor supply."

"Raising rates will lead to some tightening of financial conditions and should move to a more normal level."

"The economy no longer needs or wants very highly accommodative stance."

"As we tighten policy, or remove accommodation, we expect broader financial conditions to tighten."

"We made excellent progress on the balance sheet plan."

"We could finalize the balance sheet plan at next meeting in May."

"We will be mindful of broader financial context and want to avoid adding uncertainty."

"Our framework on the balance sheet reduction will be faster than last time."

"Balance sheet reduction will look familiar to last time though faster."

"There will be more details on our discussion will be in next Fed minutes."

• AUD/USD bulls are pressing against 0.7250 resistance.
• Fed's Powell pours dovish water over the hawkish statement. 

Following an initial sell-off in AUD/USD over the Federal Reserve interest rate decision and statement, the bulls are moving in as the greenback gives back a significant portion of its rally. At the time of writing, AUD/USD is trading at 0.7250 up some 0.78% on the day and has travelled between a low of 0.7180 and 0.7274. 

AUD/USD is trading in lockstep with US stocks which have started to recover the initial sell-off as the Federal Reserve Jerome Powell states that each meeting is a live meeting, but it will depend on inflation and economic data. He has stated that the Fed is looking for the month on month inflation to come down, pouring dovish water on what was a more hawkish statement. 

Hawkish Fed statement

Meanwhile, the Fed statement noted that the Ukraine war could lead to higher inflation and slower Gross Domestic Product. It also stated that most Fed officials see as many as seven rate increases in 2022. Additionally, the Fed’s dot plot is pencilling in rate hikes at every remaining meeting this year. 

RBA and jobs in focus

Meanwhile, in his speech last week, the Reserve Bank of Australia's Governor Phillip Lowe remarked about inflation risks to all advanced economies. As for the RBA minutes for March, they did not represent any major shift in its rhetoric, though the Board did admit that the wage outlook risks were “skewed to the upside” and that firms were “increasingly prepared to pass on higher costs”. 

As for key data in the immediate future, the focus is now on the Aussie labour market. ''We anticipate a strong labour market print for Jan as economic activity continues to pick up amid loose restrictions and robust labour demand,'' analysts at Td Securities said. 

''We forecast 50k for the headline and for the participation rate to edge higher to 66.4% which brings the unemployment rate to 4.1%, levels last seen since Mar 2008. We also see a rebound in hours worked after the 8.8% m/m decline in Jan.''

• XAU/USD is eroding support at $1,900 on a 9% reversal from $2,065 highs.
• Gold’s spikes down to $1,894 lows after Fed's rate hike.
• Muted reaction after the Federal Reserve confirms market expectations. 

Gold futures have spiked down to fresh two-week lows at $1,894 per troy ounce on Wednesday following the Federal Reserve’s decision to hike interest rates by 25 basis points to 0.50%.

Gold little changed after Fed’s rate hike

The precious metal has been practically unaffected after the US Central Bank met market expectations, raising interest rates for the first time since 2018 and hinting towards more hikes over the coming months.

The Fed’s committee has agreed to increase borrowing costs, forced by the higher inflation in the last four decades and with rather gloomy perspectives, as Ukraine’s invasion is likely to increase inflationary pressures and may derail economic growth.

Beyond that, fed chair Jerome Powell has signaled a total of seven rate hikes in 2022 and has committed to set the plan to begin reducing its $9 trillion balance sheet over the coming meeting.

XAU/USD eroding support at $1,900 area

The yellow metal is now pushing against the support area at $1,900 following a nearly 9% sell-off from early-March highs beyond $2,000.

On the downside, a successful break below $1,900, would increase bearish pressure towards $1,875 (February 24 low) and 1,844 (February 15 low).

On the contrary, any bullish reaction should extend past $1,927 intra-day high before aiming to $1,0960 (March 11 lows) ahead of the $2,000 psychological level.

Technical levels to watch

Fed Chair Jerome Powell said in his post-FOMC meeting press conference on Wednesday that every meeting going forward is going to be a live meeting (i.e. there could be a 25bps rate hike) and, if it's appropriate to move rates up more quickly, we will do so. 

Additional Remarks:

"It's certainly a possibility to move more quickly as we go through the year."

"I still expect inflation to come down in the second half of this year."

"I expect inflation to remain high until the middle of the year."

"The committee understands the time for rate increases and reducing balance sheet has come."

"It's clearly time to raise interest rate and shrink the balance sheet."

"The committee is acutely aware of the need to return to price stability."

"Part of the drop in inflation in the near-term will be due to supply chain fixes."

"We are looking for month-by-month inflation to come down."

"If monetary policy starts to bite on inflation, growth with a lag, we will see it more in 2023 and 2024."

"The Fed is getting regulatory business done at the full committee level."

"I haven't made any decisions on the front-loading policy tightening."

"If inflation readings show the need to raise rates more quickly, we will do so."

"We have the tools that we need and will use them."

"We have a plan to raise rates steadily over the course of the year."

"We will take the steps to ensure high inflation does not become entrenched."

"We will also reduce the balance sheet to make sure high inflation does not become entrenched."

"The committee acutely feels an obligation to make sure we restore price stability."

Fed Chair Jerome Powell said in his post-FOMC meeting press conference on Wednesday that the US economy is very strong and the Fed thus expects to reduce the size of its balance sheet. The slowdown from Omicron was mild and brief, Powell added, noting that labour markets are extremely tight and improvements in labour markets have been widespread. Labour demand remains very strong, he added, and labour supply subdued and the Fed expects the labour market to remain strong. Inflation remains well above the Fed's goal, Powell said. 

Additional remarks:

"Supply disruptions are larger and longer-lasting than expected."

"The surge in energy prices putting additional upward pressure on US inflation."

"Russia's invasion of Ukraine has added to inflation pressures."

"A strong labor market is only possible with price stability."

"We expect inflation to return to 2.0%."

"Inflation will take longer to return to our goal than initially expected."

"Reducing the balance sheet will also play an important role in tightening policy."

"Implications of Russia's invasion of Ukraine are highly uncertain."

"We will strive to avoid adding to uncertainty."

"We are attentive to risks of further upward pressure on inflation."

• The US central bank hiked rates 25 bps, as widely expected by the markets.
• The Brtish pound’s initial reaction was downwards, piercing the 1.3060, though of late extended losses towards 1.3050.
• FOMC voted 8-1 with St. Louis Fed President Bullard favoring a 50 bps hike.

On Wednesday, the Federal Reserve hiked 25 basis points the Federal Funds Rate (FFR) for the first time in three years. At press time, the GBP/USD is trading around 1.3053, clinging to 0.10% gains.

GBP/USD’s Market reaction

The British pound dropped from nearly 1.3100 towards 1.3060 once the headline crossed the wires, while the US 10-year Treasury note yield rose to 2.212%, the highest since May 2019.

Summary of remarks of Fed monetary policy statement

Fed officials noted that inflationary pressures remain high courtesy of supply difficulties and the pandemic. Furthermore, they said that the implications of the Russian war are “highly uncertain” for the US economy and would likely create additional upward pressure on inflation and weigh on economic activity.

Meanwhile, the Summary of Economic Projections (SEP) revealed the dot-plot, where Fed board members expect at least seven hikes in 2022.

Regarding the labor market, the committee expects the Unemployment rate to hit 3.5% by the end of 2022 and remain at that level in the following year. Policymakers expected to begin reducing Fed’s holdings of Treasuries and mortgage-backed securities (MBS) at a coming meeting. They added that they would adjust monetary policy stance as appropriate if risks emerge that could impede Fed’s goals.

Noteworthy that the Federal Open Market Committee voted 8-1 with St. Louis President James Bullard dissenting, who favored a 50 basis point increase.

Hourly chart

• EUR/USD drops o a strong US dollar following hawkish Fed statement. 
• Traders await Powell's comments in the presser. 

EUR/USD has dropped to 1.0947 after the Federal Reserve has raised the benchmark interest rate by 25 basis points, in line with expectations. This was the first rate hike since 2018, aimed at stemming soaring inflation.

The single currency that had been rising on Ukraine crisis peace talks hopes had its legs taken out when the US dollar rallied some 0.30% on the Fed decision and statement. 

The Fed statement noted that the Ukraine war could lead to higher inflation and slower Gross Domestic Product. It also stated that most Fed officials see as many as seven rate increases in 2022. In the statement, it said that the members expect to begin reducing holdings of treasury securities and agency mortgage-backed securities at a coming meeting. 

Overall, the Fed sees inflation still high, owing to supply and demand mismatches caused by the pandemic, rising energy prices, and broader pricing pressures. Fed officials have signalled plans to lift rates steadily this year to lower inflation and this hawkish rhetoric is giving the US dollar a boost.

Essentially, the Fed’s dot plot is pencilling in rate hikes at every remaining meeting this year. Fed funds are now pricing in a 63% chance of a 50 bps hike on May 4, as a consequence, the US 2-year yields have moved in on the 2% mark.

The focus will now turn to the Fed's chairman, Jerome Powell, who will speak live at the presser. 

Watch Live: Jerome Powell at the FOMC presser

Traders betting on a stronger US dollar will be looking for Powell to sound hawkish and play down geopolitical risks, hinting at the potential for faster or even 50bp hikes later this year.

However, the dollar would come under pressure if he plays up the risk of geopolitical uncertainty on the US economy. If he suggests that inflation may slow in the second half of the year as COVID shocks fade, then that would be very negative for the US dollar.

EUR/USD technical analysis

The 4-hour M-formation and trendline support is compelling as the price stalls at the closing price from yesterday's business. This is acting as support, so there could be some upside from here with the neckline of the formation as a bullish target near 1.0980. This comes in as a 50% mean reversion of the hourly bearish impulse:

The US Federal Reserve announced on Wednesday that the Federal Open Market Committee (FOMC) had voted to lift the Federal Funds Rate (FFR) target range to 0.25-0.50% from 0.00-0.25%, as expected. In the Fed's updated statement on monetary policy, it signaled that further rate hikes would be appropriate, as expected. 

Eight out of nine policy voters supported the move, with the one dissenting vote coming from St Louis Fed President James Bullard who favoured a larger 50bps move to 0.50-0.75%. The Fed said it expects inflation to return to its 2.0% target and for the labour market to remain strong with an appropriate firming of the stance of monetary policy. 

The Fed noted that inflation remains elevated, reflecting supply/demand imbalances related to the pandemic, higher energy costs and broader price pressures. The Fed noted, as Chairman Jerome Powell did in a speech last week, that the invasion of Ukraine by Russia is causing tremendous human and economic hardship and that the implications for the US economy are highly uncertain, but in the near-term, the invasion and related events are likely to create additional upwards pressure on inflation and to weigh on economic activity. 

Dot-plot

• The Fed's median view of the Fed funds rate at the end of 2022 was raised to 1.9% from 0.9% back in December. That implies the Fed now sees itself raising interest rates at every meeting for the rest of the year, meaning a total of seven 25bps hikes in 2022 (including this Wednesday's hike). 
• The Fed's median view of the Fed funds rate at the end of 2023 was raised to 2.8% from 1.6% back in December. That means the Fed views itself hiking interest rates by 25bps another four times in 2023 after seven 25bps moves in 2022. 11 of the Fed's 16 policymakers see the Fed Funds rate moving above the 2.4% neutral rate by the end of 2023, the new dot-plot showed. 
• The median view of the Fed funds rate at the end of 2024 was lifted to 2.8% from 2.1% in December. 
• The median view of the Fed funds rate in the longer-term was lowered to 2.4% from 2.5% in December. 

Economic Forecasts

• The Fed forecasts the unemployment rate to end 2022 at 3.5%, unchanged from its prior estimate, to end 2023 at 3.5% and to then edge up to 3.6% in 2024 before returning to its normal level of 4.0% in the long term. 
• The Fed sees PCE inflation of 4.3% in 2022 (revised up from the 2.6% estimate in December), 2.7% in 2023 and 2.3% in 2024, before returning to 2.0% in the long-run. 

Market Reaction

The Fed's new dot-plot was much more hawkish than expected, with the Fed signaling a 25bps rate hike at every meeting to the rest of the year followed by a further four in 2023. US 2-year yields (the most sensitive to Fed rate hike expectations) have rocketed towards 2.0% from under 1.90% to reflect the more hawkish rate path and are now up about 14bps on the day. 

Longer-term yields are also higher, with the 10-year jumping above 2.20% to hit new cycle highs but up a comparatively more modest 7bps on the day. The belly of the US curve has inverted for the first time since March 2020, with the 7-year yields now above the 10-year yield (at 2.26%ish and 2.23%ish respectively). 

The US dollar has been driven higher by Fed hawkishness and higher US yields, with the DXY testing 99.00 again, up from its pre-ed levels under 98.80. Further aiding USD upside is a safe-haven bid with US equities tumbling in wake of the Fed's latest announcement. The S&P 500 has dropped over 30 points from the 4310s to 4280 area in recent trade and is now barely trading with gains on the day. 

Focus now turns to Fed Chair Jerome Powell's post-meeting press conference which is scheduled to begin at 1830GMT. 

• The NZD/USD advances some 0.52% ahead of the Fed in the day.
• An upbeat market mood keeps the pair in the bid, though downside risks remain.
• The Fed is expected to raise rates by 25 bps.

The New Zealand dollar jumps from daily lows and so far is gaining some 0.53%, amid a positive market mood, ahead of the FOMC monetary policy decision. At press time, the NZD/USD is trading at 0.6810.

Upbeat market mood courtesy  of improved discussions between Russia-Ukraine

Market sentiment remains positive, reflected by US equities trading in the green, meanwhile, European bourses closed with gains. Safe-haven peers depreciate in the FX space, benefiting the risk-sensitive currencies, like the NZD and the AUD.

Russia-Ukraine jitters keep grabbing the headlines throughout the day. However, of late, as the Federal Reserve decision looms, market players’ focus is on the US central bank. Analysts expect the Fed to hike rates by 0.25% for the first time in three years. While money market futures have already priced in an 87% chance of that, the focus would be on balance sheet reduction and the Summary of Economic Projections (SEP), with its dot-plot that reflects interest rates expectations of the board. Noteworthy, what the board projects on inflation and the US economic outlook.

Around 18:30 GMT, Fed’s Chief Jerome Powell would hold its press conference. He would be asked about the war in Ukraine, which injected plenty of volatility into the financial markets and its impact in the domestic and global economies.

Late on the day, the New Zealand economic docket would release GDP figures for Q1, with a gain of 3.2% YoY expected.

Technical levels to watch

• The Australian dollar consolidates at 0.7250 after pulling back from 0.7275.
• The positive market sentiment has favored the aussie against the US dollar.
• AUD/USD might retreat towards 0.7100 on a hawkish Fed – Westpac.

The Australian dollar has seen some positive price action during the Asian and European sessions to extend its recovery from 0.7180 lows. Later on, the pair has been capped at 0.7275 before consolidating around 0.7250 as the market braces for the Federal Reserve’s Monetary policy decision.

The USD has lost ground on a risk-on session

The more positive market sentiment, triggered by hopes of progress in the Russia – Ukraine peace talks and the Chinese Government’s announcement of a new set of economic stimulus measures, has boosted the market mood, which has favored the Australian dollar.

Equity markets in Asia and Europe have posted solid gains on Wednesday, while the major US indexes remain positive with all eyes on the US Central Bank's Monetary Policy Committee.

The Federal Reserve is widely expected to hike interest rates for the first time since 2018 in order to ease the highest inflation in four decades. The focus, however, will be on the ensuing statement and on the bank's plan to bring prices under control without hurting the economic growth.

AUD/USD to dip towards 0.71 on hawkish Fed – Westpac

The FX Analysis team at Westpac expects the pair to pull back about 150 pips from current levels on the back of a hawkish Fed statement: “Near-term, risks lie towards the 0.7100 area, with the US dollar benefiting from both haven/liquidity demand and what should be a hawkish tone from the FOMC as it delivers the first of many rate rises.” 

Technical levels to watch

• GBP/USD continues to consolidate just under 1.3100 pre-Fed policy announcement, boosted amid the market’s risk-on vibe.
• The Fed is expected to hike rates by 25bps, with focus on the new forecasts, dot-plot and Powell’s tone.

GBP/USD continues to consolidate just to the south of the 1.3100 level with the Fed policy announcement due at the top of the hour. At present, the pair is trading with gains of about 0.4%, with sterling performing well with markets in a risk-on mode amid hopes for further progress in Russo-Ukrainian peace talks. Headlines regarding this topic have been mixed in recent hours, but FX markets haven’t paid too much head and are instead in their typically pre-Fed policy announcement holding pattern.

The bank is expected to lift rates by 25bps for the first time in three years. Traders/market participants will be predominantly focused on 1) the Fed’s new economic forecasts, 2) the Fed’s new dot-plot and 3) the tone of the statement and Fed Chair Jerome Powell’s press conference remarks. Any dovish surprises may be enough to see GBP/USD break back above 1.3100, opening the door to a push on towards 1.3200.

But most do not expect a dovish outcome, with the Fed policymakers having seemingly expressed more worry in recent weeks about the worsening inflation outlook given recent geopolitical events. Recent moves in long-term US bond yields suggest markets increasingly believe that, in the long-run, the Fed will lift rates back to the so-called “neutral” level (in the 2.0-2.5% region). Any hawkish signals from Wednesday’s meeting that spur further upside in long-term US yields would risk sending GBP/USD back towards weekly lows in the 1.3000 area, especially given that the BoE, who set rates on Thursday, won’t be expected to match any Fed hawkishness.

• Gold is offered but is running into a demand area.
• XAU/USD bulls could be tempted should the bears start to bail out.
• Gold to extend downward correction on hawkish Fed.

The gold price is on the backfoot on Wednesday with the signs of a compromise by Russia and Ukraine in "more realistic" peace talks. This also weighed on the US dollar that slid further from almost two-year highs reached over the past week. Markets now await a likely rate hike by the Federal Reserve.

The Fed is expected to boost its benchmark overnight rate by 25 basis points when it releases a policy statement at 2 pm ET (1800 GMT). However, this is well and truly priced in, so the decision itself may not be the driver. Instead, traders will be in anticipation of how hawkish the Fed will be in the face of the Ukraine crisis. 

Meanwhile, the signs of Ukraine and Russia compromise has sent relief through global financial markets. Russia's foreign minister, Sergei Lavrov, also said some formulations of agreements with Ukraine were close to being agreed upon. Moscow said the sides were discussing status for Ukraine similar to that of Austria or Sweeden, meaning being members of the European Union but staying neutral and outside the NATO military alliance.

Risk rallies in global stock markets

Ukraine's chief negotiator said it would give Kyiv binding international security guarantees to prevent future attacks. Ukrainian President Volodymyr Zelensky said peace talks between Russia and Ukraine were sounding more realistic but more time was needed, as Russian airstrikes killed five people in the capital Kyiv and the refugee tally from Moscow's invasion reached 3 million.

In light of the prospects of a ceasefire that could come in due course, abating the risks of further escalation in Europe, or indeed worldwide, world stocks recovered ground on Wednesday. The MSCI world equity index rose 0.87%, moving away from the one-year lows hit in the previous session. We have seen a relief rallying European stocks as well, with STOXX gaining 2.2%. On Wall Street, the S&P 500 is u over 1%, the Nasdaq Composite higher by 1.5% and the DJI is higher by 0.7%.

Gold on the Fed

Analysts at TD Securities have argued that ''we could now see a coordinated reversal of flows should the FOMC meeting tilt hawkishly.''

''In this lens, while we don't expect much forward guidance, a rise in the dot plot could be a potential catalyst. We look for an increase in the median to 5 dots for 2022 from 3, and an increase beyond this could be seen as very hawkish.''

''Importantly for global macro, any details on caps for the balance sheet runoff could also push rates higher, with quantitative tightening likely to be a particularly potent channel for asset prices.''

Gold technical analysis

Gold is meeting a support area on the daily chart at the time of writing and is due for a correction from within. There is room for a continuation to 24 Feb. lows $1,878, but as it stands, a 50% mean reversion from here could be on the cards, targeting the neckline of the M-formation at around $1,960/70.

Jerome Powell, Chairman of the Federal Reserve System, will be delivering his remarks on the monetary policy outlook at a press conference following the meeting of the Board of Governors. Powell's speech will start at 18:30 GMT.

Follow our live coverage of the Fed's policy announcements and the market reaction.

About Jerome Powell (via Federalreserve.gov)

"Jerome H. Powell took office as Chairman of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term*. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028."

"*Note: On February 4, 2022, the Federal Reserve Board named Jerome H. Powell as Chair Pro Tempore, pending Senate confirmation to a second term as Chair of the Board of Governors."

Payment on Russian government dollar bonds with coupons due on Wednesday had not been posted by close of business in London, according to two sources familiar with the situation. 

This could lead to the sanctions-racked country defaulting for the first time since 1998.

Moscow was due to make $117m (£89.4m) interest payments, or coupons, to investors holding two bonds denominated in dollars. But with much of its foreign exchange reserves frozen by international sanctions, it may be unable to pay.

There is a 30-day grace period, but this could be paving the way to a historic default that would add to the intense pressure on the Russian economy.

However, on the flip side, as the sanctions dig in, there could be a compromise on the horizon between Ukraine and Russia and for that, markets are risk on. The MSCI world equity index rose 0.87%, moving away from the one-year lows hit in the previous session. On Wall Street, the S&P 500 is u over 1%, the Nasdaq Composite higher by 1.5% and the DJI is higher by 0.7%.

Russia's foreign minister Sergei Lavrov also said some formulations of agreements with Ukraine were close to being agreed upon. Moscow said the sides were discussing status for Ukraine similar to that of Austria or Sweeden, meaning being members of the European Union but staying neutral and outside the NATO military alliance.

• The euro attempts to return above 1.1000 after its reversal from 1.1040 area.
• The pair is trading sideways with the market awaiting the Fed's statement.
• EUR/USD could drop to 1.08 on the back of a hawkish Fed – Scotiabank.

The common currency’s pullback from session highs at 1.1040 has been contained at 1.0990, and the pair is  now trying to return above 1.1000 with the investors awaiting the release of the Fed’s monetary policy decision.

The euro is hovering around 1.1000 with all eyes on the Fed

The pair remains trading sideways within a tight range around 1.1000 in a rather quiet session as the market braces for the first Federal Reserve’s rate hike since 2018.

The brighter risk sentiment has been supportive to the euro during the previous sessions, and has fuelled a moderate rebound from Tuesday’s lows at 1.0925.

Some positive comments on the Eastern European crisis by Russian and Ukrainian representatives have boosted optimism about a cease-fire, while earlier on Wednesday, the announcement that China is planning to roll out a new set of economic stimulus measures has boosted market mood, which has supported the euro against safer assets like the US dollar.

A hawkish Fed might send the euro to 1.08 – Scotiabank

Scotiabank’s FX analysis team, however, is skeptical about the euro’s near-term uptrend and warns about a bearish reaction to Fed’s statement: “A more hawkish than expected decision should pull EUR/USD under the 1.09 mark toward a re-test of 1.08 over the balance of the week, while a cautious hike could see the pair aim for a test of 1.11 – although we think the trend remains negative with the Fed set to generally meet market expectations through 2022.”

Technical levels to watch

• The Mexican peso consolidates near the 100-day moving average (DMA), pre FOMC.
• Global equity indices reflect the positive market sentiment.
• USD/MXN Price Forecast: Upward biased, but would depend on the Federal Reserve decision.

The Mexican peso is strengthening for the second straight day in the week, after a significant depreciation in the last week, where the USD/MXN reached a YTD high at 21.4679, on a flight to safe-haven assets, courtesy of the conflict between Russia-Ukraine. At the time of writing, the USD/MXN is trading at 20.70, down 0.59% ahead of the FOMC meeting.

 A positive market mood surrounds the financial markets. The European and US equity indices are rallying, while the Mexican bourse rises 1.06% in the session.

USD/MXN Price Forecast: Technical outlook

Overnight, the USD/MXN slid from daily highs near 20.8525 to 20.6545 lows, on goodish US economic data, with the US Retail Sales moderating its pace in February, though fell short of forecasts. However, around 18:00 GMT, the Federal Reserve would unveil its monetary policy, an event that could cause violent swings in the USD/MXN exchange rate.

Daily chart

From a technical perspective, the USD/MXN aims upward, as depicted by the daily chart, with all daily moving averages (DMAs) sitting below the exchange rate. However, in the near term, the 1-hour chart shows the pair consolidated in the 20.80-21.05 area, and worth noting the simple moving averages (SMAs) reside above the spot price, which would be tested in the event of a hawkish than expected Federal Reserve.

Hourly chart

Upwards, the USD/MXN first resistance would be March 2 high at 20.7981. Breach of it would expose the 50 and 100-hour SMA at 20.84 and 20.8885, respectively. Once cleared, the next ceiling level would be the confluence of the 200-hour SMA and the 21.0000 figure.

Downwards, the USD/MXN first support would be 20.7000. A decisive break would expose 20.5783 March 2 low, followed by the 50-day moving average (DMA) at 20.5668 and the 200-DMA at 20.4060.

• Euro bulls lose momentum and the pair stalls at 0.8400.
• BoE rate hike expectations are supporting the GBP
• EUR/GBP, looking for direction between 0.8385 and 0.8450.

The euro has been moving sideways around the 0.8400 level on Wednesday, looking for direction after pulling back from one-month highs at 0.8450.

The euro remains flat with all eyes on the Federal Reserve

In absence of first-tier macroeconomic data in Europe or the UK, the EUR/GBP remains practically unchanged on the daily chart, with the investors awaiting the release of the Federal Reserve’s monetary policy decision.

The Fed is widely expected to hike interest rates for the first time since 2018 with the country facing the highest inflation in four decades. The main focus, however, will be on the bank’s statement and the ensuing press release to assess how is the Fed going to manage to bring consumer prices under control without hurting economic growth in a rather delicate moment.

Furthermore, the Bank of England is expected to follow suit and raise its benchmark interest rate on Thursday, which might be supporting the GBP from further depreciation.

EUR/GBP is trapped between 0.8450 and 0.8385

At the moment, the pair remains capped below March 15 high at 0.8450, which is defending February 7 high at 0.8475 and December 20 and 21 highs at 0.8550.

On the downside, immediate support lies at 0.8385 (March 15 low) and below here, 0.8355, where the 50-day SMA and March 11 lows meet. A breach of that level would cancel the near-term uptrend and, probably add pressure towards 0.8300 (February 21, 22 lows).

Technical levels to watch

• The Loonie advances some 0.30% vs. the greenback amid an increased risk appetite.
• Discussions between Russia-Ukraine would continue, though fighting remains.
• Canadian inflation approaches the 6% threshold, while US Retail Sales moderate.

USD/CAD slides for the second straight day in the week, ahead of the FOMC monetary policy decision amid a risk-on market mood, as geopolitical jitters around Russia-Ukraine appear to abate. However, of late, a contradiction between newswires keeps traders on their toes, weighing the outcome in Eastern Europe after a three-week war so far. At press time, the USD/CAD is trading at 1.2725, down 0.33%.

In tone with a positive market sentiment, European and US equity indexes keep trading in the green. In contrast, the CBOE Volatility Index (VIX), the so-called fear index, fell below the 28 mark for the first time since February 25, signaling increased investor appetite for riskier assets.

The US Dollar Index, a gauge of the greenback’s value vs. six rivals, is down 0.50%, sitting at 98.56, ahead of the Federal Reserve monetary policy meeting.

Discussions between Russia-Ukraine “appear” to improve

Earlier in the day, sources cited by the Financial Times said that Russia and Ukraine had made significant progress towards a potential 15-point peace plan that would include a ceasefire and Russian withdrawal from Ukraine. The deal includes that Ukraine would not join NATO and would not host foreign military bases. However, of late, Ukraine has reportedly rejected Russian claims that it was open to adopting a neutrality model comparable to Sweden in peace talks, reported the Independent on Wednesday.

The USD/CAD barely moved to those newswires; instead, traders were focused on the Canadian and US economic dockets. In Canada, inflation rose by 5.7%, higher than the 5.5% y/y estimated by analysts, while the so-called core, which excludes volatile items, rose by 4.8%, more than the 4.5% foreseen.

Canadian inflation approaches the 6% threshold, and US Retail Sales moderate in February

In the US docket, Retail Sales for February increased moderately, coming at 0.3% vs. 0.4% m/m. Sales excluding autos rose by 0.2%, lower than the 0.9% m/m. Noteworthy that data for January was revised higher to show sales surging 4.9% instead of 3.8% as previously reported.

Late in the day, the Federal Reserve would unveil its monetary policy decision. Market players expect a 25 basis point increase and look forward to the dot-plot, which could guide subsequent rate hikes. Noteworthy, what would the FOMC say about the balance sheet reduction due to the ongoing conflict in Eastern Europe, so traders need to be aware of this.

• USD/JPY continues to move higher and, just under 118.50, is on course for an eighth successive day in the green.
• The pair is eyeing a break above late-2016/early-2017 highs in the 118.60s.
• Markets are risk-on in the lead up to the Fed announcement amid signs of progress in Russo-Ukraine peace talks.

USD/JPY’s upwards trajectory over the past few sessions that saw the pair break above key resistance in the 116.40s has continued on Wednesday, with the pair coming within a whisker of hitting 118.50 for the first time since January 2017. Trading just below the half-round figure, the pair is up another 0.2% on the day and set for an eighth successive day of gains during which time the pair has rallied more than 3.0%. The sharp rally has been driven an equally steep rise in long-term US bond yields over the same period, with the 10-year yield nearing 2.20% on Wednesday from as low as the 1.60s% as recently as the start of last week.

Markets are in a very risk-on mood on Wednesday in the lead-up to the Fed policy announcement amid signs of progress in Russo-Ukraine peace talks (admittedly the reports have been mixed), reducing the demand for safe-havens like US bonds. Whilst this also reduces the haven appeal of both USD and JPY, the yen is worse hit given the upwards pressure on US yields rendering it a comparatively less attractive investment. The fact that the Fed is expected to implement its first 25bps rate hike in three years later in the day is also helping to keep yields and USD/JPY underpinned.

Any surprising Fed hawkishness, perhaps in the new Fed dot-plot, or perhaps in the tone of Fed Chair Jerome Powell’s post-meeting press conference, could be enough to trigger further US yield upside. That could see USD/JPY break above the late-2016/early-2017 highs in the 118.60s and press on towards the 120.00 mark and beyond. Conversely, if hawkish expectations aren’t met, profit-taking in wake of the recent rally could quickly see USD/JPY slide back to test old highs in the 116.40 area which should not offer strong support.

• The euro returns above 130.00 and retraces most of the late February sell-off.
• Risk appetite and higher US yields are hurting the Japanese yen.
• EUR/JPY is now aiming to 130.30 and 130.75.

The euro has extended its uptrend against the Japanese yen on Wednesday, breaching the 130.00 psychological level to hit fresh 3-week highs at 130.55.

The euro keeps rallying against a weak yen

The common currency has appreciated nearly 5% over the last week. The pair has managed to retrace most of the sell-off seen in late February, following a sell-off to 16-month lows at 124.40 area.

The moderate risk appetite witnessed over the last sessions on hopes of a Russia - Ukraine agreement to stop the war and China's announcement of fresh stimulus measures to support economic growth have fuelled the euro's recovery against the safe-haven yen.

Beyond that, hopes of a Federal Reserve rate hike later on Wednesday and the increasing yields differential between the US and Japan have been hammering the yen during the last week.

EUR/JPY: Next upside targets are 130.30 and 130.75

From a technical point of view, the pair has confirmed above the 61.8% Fibonacci retracement of the February-March decline, at 129.80. Now the near-term focus is set at 130.30, (February 25 and 28 highs) and 130.70 (February 28 high)

On the downside, a potential correction would look for support at 128.80 (March 2, 10 highs) before testing later January lows at 128.25 and 127.40 (March 10 low).

Technical levels to watch

The Bank of England (BoE) will announce its decision on Thursday, March 17 at 12:00 GMT and as we get closer to the release time, here are the expectations forecast by the economists and researchers of 10 major banks. 

The BoE is widely expected to raise the benchmark interest rate by 25 bps from 0.50% to 0.75%, marking a lift-off for a third consecutive meeting, amid Ukraine crisis-led uncertainty, growth concerns and raging inflation.

TDS

“We expect the MPC to hike Bank Rate by 25bps and signal further tightening, but with a cautious tone. We expect a single further hike this year, in May. A shifting UK macro mix of growth and inflation leaves GBP vulnerable, especially given the extent of BoE hikes priced into the curve.”

Rabobank

“We expect the BoE to press ahead with a 25 bps rate increase to 0.75%. The central bank is, however, stuck between a rock and a hard place. Stagflation risks are very real. Tighter monetary policy will create more of the ‘stag’ without being very effective against the ‘flation’. The recent surge in the price of imports makes it almost certain that inflation heads higher than the projected peak of 7.25%; even a double-digit rate of inflation can’t be ruled out. The passthrough from the real income squeeze to real spending should become increasingly visible over the course of 2022. We have added three more 25 bps hikes to 1.50% to our forecasts (May, June, August). If economic growth does indeed stagnate, these could very well be a prelude to cuts in 2023.”

ING

“We suspect the BoE will opt for another 25bp rate rise, rather than a larger 50bp move. Markets are once again pricing six rate rises this year, and comments from officials have offered some modest pushback against these expectations. Our own view is that after a couple more hikes, the committee is likely to pause and put greater emphasis on the deteriorating growth backdrop. After all, such a sharp rise in oil and gas prices is more likely to be medium-term disinflationary, even if it keeps headline inflation rates higher this year.”

Nomura

“In the absence of the Russia/Ukraine crisis having escalated there would almost certainly be more sizeable risks of the BoE delivering a 50bp hike. But in the event, geopolitical risks have intervened and a 25bp hike looks to be the most reasonable course of action for the MPC. Around 30bp is priced for the March meeting, reflecting around a 20% risk of a 50bp hike. No new forecasts are published by the Bank on this occasion but expect the minutes to say something about the Bank’s preliminary view on the potential impact of the war in Ukraine on the economy.”

Deutsche Bank

“We expect a +25bps hike to 0.75%, the pre-pandemic level. Our projected terminal rate is 1.75%.”

MUFG

“The BoE’s outlook for the UK economy will have deteriorated further since the February MPC meeting. We expect the BoE to acknowledge it the week ahead that inflation will hit an even higher peak and remain at higher rates for longer through until next year, but the BoE should still emphasize that inflation is more likely to undershoot their target further out because a larger slowdown in growth from the bigger energy/commodity price shock will be forthcoming. It will provide further pushback against market expectations for rate hikes that have gone even further to price in the BoE policy rate peaking at around 2.3%. We expect the BoE to stick to guidance that further ‘modest’ tightening is required.

Citibank

“We expect the MPC to continue on a hiking trajectory – with a majority continuing to back a further 25bp hike to Bank Rate this week and front-load the withdrawal of monetary stimulus.”

Wells Fargo

“We expect the BoE to raise its policy rate another 25 bps to 0.75%, with a further 25 bps hike also seen at the May meeting. By around mid-year, once higher prices start to weigh more meaningfully on consumer purchasing power and perhaps as inflation starts to recede, we do see some slowing in the pace of monetary tightening. Over the balance of the year, we see a further two 25 bps hikes at the August and November monetary policy announcements, which would see the Bank of England's policy rate finish 2022 at 1.50%. While that would represent a faster pace of rate hikes than we previously envisaged, it would still fall short of tightening currently priced in by market participants, which sees the central bank's policy rate finishing this year around 2.00%.”

Standard Chartered

“BoE will want to frontload rate hikes to address elevated inflationary pressures, and we continue to see 25bps moves at this week’s meeting and in May. Thereafter we expect the BoE to be more concerned over the growth impact, with the economy likely at risk from recessionary conditions from Q2- Q4. We, therefore, see the base rate climbing to 1.0% and remaining there for the remainder of the year, which is considerably less aggressive than the 6-7 rate hikes priced in by the markets by year-end.”

Credit Suisse

“We expect a 25bp along with 7-2 vote in that direction, with 2 votes for a 50bp hike. With some economists looking at UK inflation pushing close to 10% over the course of 2022, in our view, the BoE has a reasonable case to frontload rate hikes now while it can in order to help contain inflation expectations. Having been of the view that the BoE could deliver a hawkish surprise in both December and February, we are prepared to take this risk again this week and maintain our EUR/GBP 0.8275, target, which should also keep the 1.3000 level intact for GBP/USD. If we are wrong, and the BoE chooses to ignore its inflation mandate as many economists are calling for and delivers a ‘dovish hike’ that sees priced-in hikes dissipate, we would expect GBP/USD 1.3000 to break in short order and we would target 1.2870. Meanwhile, EUR/GBP would quickly test levels above its current 200-day moving average at 0.8472.”

A Ukrainian official said on Wednesday that negotiations have not yet progressed significantly and that the more positive tone from Russia was more about Moscow wanting sanctions pressure eased, reported Bloomberg's Annmarie Hordern. She quoted the official as referring to Russia's tone as a "smoke curtain". 

• The pound is trying to extend its recovery from 1.3000 to levels beyond 1.3100.
• A more positive risk sentiment is favoring the sterling against the US dollar.
• Longer-term, the GBP/USD remains negative, aiming towards 1.2800 – Scotiabank.

The pound’s recovery from 16-month lows right below 1.3000 seen earlier this week is struggling to confirm past 1.3100. The cable is posting gains for the second consecutive day, although it seems to have found resistance right above the mentioned 1.3100.

The cable extends gains against a somewhat softer USD

The GBP/USD is trading higher, buoyed by a brighter market sentiment on Wednesday. Positive comments about the Ukrainian peace talks and the economic stimulus announced by Chinese authorities have boosted sentiment on Wednesday, sending stock markets higher for the benefit of the risk-sensitive pound and euro.

On the other hand, the US dollar seems to be pulling back, with the investors bracing for a historical decision by the Federal Reserve. The Fed is widely expected to hike interest rates for the first time in three years aiming to bring inflation under control.

The Dollar Index, which measures the USD against a basket of the six most-traded currencies, is retreating about 0.4% after having hit intra-week lows at 98.28.

GBP/USD expected to drop towards 1.2800 ­– Scotiabank

In a longer-term perspective, the FX Analysis Team at Scotiabank sees the pound resuming its wider downtrend soon: “The balance of economic risks will also see the BoE deliver a more apprehensive hike than the Fed, with the UK economy (household spending in particular) more susceptible to the impact of higher energy and food prices resulting from the war in Ukraine (…) The GBP could aim for a test of 1.28 over the next few days/weeks on the combination of a hawkish Fed and a cautious BoE.”

Technical levels to watch

• The Australian dollar surged 0.77% amid an improved market mood.
• Russia-Ukraine hostilities persist, though discussions seem to progress.
• AUD/USD Price Forecast: Neutral, despite the 50 and the 100-DMA sitting below the exchange rate.

The Australian dollar rallies ahead of the second Federal Reserve monetary policy meeting, amid an improvement in talks between Russia-Ukraine, and a worse than expected US Retail Sales report. At the time of writing, the AUD/USD is trading at 0.7253.

Russia-Ukraine negotiations seem to have progressed

Meanwhile, talks between Russia and Ukraine appear to make substantial progress. Sources cited by the Financial Times said that both parties had made significant progress towards a potential 15-point peace plan that would include a ceasefire and Russian withdrawal from Ukraine. The deal includes that Ukraine would not join NATO and would not host foreign military bases.

Although it is a piece of positive news, the market barely reacted to it, as dip buyers entered since the beginning of the Asian session.

In the meantime, European and US equity indexes keep trading with gains, while in the FX space, most G8 currencies rally against safe-haven peers. The US Dollar Index, a gauge of the greenback’s value vs. six rivals, is down 0.50%, sitting at 98.56, ahead of the Federal Reserve monetary policy meeting.

In the economic docket, the Australian docket was absent. Retail Sales for February increased at a moderate pace in the US, though a tenth lower than foreseen, at 0.3% vs. 0.4% m/m. Sales excluding autos rose by 0.2%, lower than the 0.9% m/m. Noteworthy that data for January was revised higher to show sales surging 4.9% instead of 3.8% as previously reported.

Late in the day, around 18:00 GMT, the US central bank would reveal its monetary policy decision, widely expected to increase rates by 25 basis points. At the same time, AUD/USD trader’s eyes would also digest the Summary of Economic Projections (SEP), specifically the dot-plot, which could give forward guidance, on interest rates expectations by the board.

AUD/USD Price Forecast: Technical outlook

Overnight, the AUD/USD surged higher on an improved market mood, despite having the Fed’s monetary policy decision around the corner. The AUD/USD reacted higher from daily lows around 0.7180, but the rally stalled some pips short of the 38.2% Fibonacci level at 0.7260.

The AUD/USD bias remains neutral, despite trading above the 50 and 100-day moving averages (DMAs). Upwards, the pair would face solid resistance around 0.7260, followed by the 0.7303-14, where the 200-DMA and the January 13 daily high lie, and then March 10 daily high at 0.7367.

On the flip side, the AUD/USD first floor would be the 100-DMA at 0.7217, immediately followed by 0.7204, the 50% Fibonacci level, and the subsequent support would be March 15 daily low 0.7165.

• WTI has been buffeted by mixed Russo-Ukraine headlines on Wednesday and continues to trade in the mid-$90.00s.
• $100 has acted as a ceiling on the day amid peace talk optimism and ongoing China lockdown woes.

Conflicting reports on the state of Russo-Ukraine peace talks, with the FT touting significant progress towards a potential 15-point peace plan but the Independent saying that Ukraine has rejected a Russian neutrality proposal, are giving oil traders plenty to think about. Having come within $1.0 of retesting the $100 level on Wednesday, front-month WTI futures are back to trading in the mid-$90s, not too far above earlier session lows and Tuesday’s weekly lows just under $94.00. At current levels in the $96.00s, WTI is up just over $1.50 on the day, marking some much-needed respite given prices had fallen over $14 over on Monday and Tuesday.

Official US inventory data released not long ago was bearish, with US crude oil inventories growing by 4.3M barrels, well above the expected 1.375M barrel draw. Distillate stocks also saw a surprise build. This, alongside mixed Russo-Ukraine reports, has helped crude oil prices to stave off further declines as a result of concerns that lockdowns in China might hit demand. Ahead, WTI traders will be keeping an eye on the upcoming Fed meeting to see if it has any read across to risk appetite that might impact oil prices.

With WTI holding steady for now in the $95.00 area and above its 50-Day Moving Average around $93.00, the oil bulls will, for now, remain comfortable that the long-term uptrend in play since December 2021 is not yet dead. If anything, the recent more than 25% correction from earlier monthly highs has brought prices back to the previous trend. But headline risk remains elevated and a further widening of China lockdowns and progress in Russo-Ukraine peace talks could easily see WTI test the $90.00 area.

• USD/TRY regains some upside traction above 14.60.
• The FOMC is expected to raise rates by 25 bps later on Wednesday.
• The CBRT is seen on hold at its meeting on Thursday.

The Turkish lira gives away part of the recent advance and lifts USD/TRY to the area above 14.60 on Wednesday.

USD/TRY focused on Fed, CBRT

USD/TRY navigates the positive territory after three consecutive daily drops, managing to reverse the weekly pullback to the 14.50 region despite the soft note in the greenback and the broad-based upbeat mood surrounding the risk complex.

In the meantime, all the attention is expected to be on the Federal Reserve gathering later in the session, where a 25 bps interest rate hike is very much priced in.

Next of note in the domestic docket, the Turkish central bank (CBRT) is seen keeping the One-Week Repo Rate unchanged at 14.00% at its meeting on Thursday.

What to look for around TRY

The lira regained some poise in past sessions, leaving the area of YTD lows vs. the US dollar around the 15.00 zone (March 11). In the very near term, price action in the Turkish currency is expected to gyrate around the performance of crude oil, the broad risk appetite trends, the FOMC event and the progress of the peace talks in the Russia-Ukraine front. Extra risks facing TRY also come from the domestic backyard, as inflation gives no signs of easing, real interest rates remain negative and the political pressure to keep the CBRT biased towards low interest rates remain omnipresent.

Key events in Turkey this week: CBRT Meeting (Thursday).

Eminent issues on the back boiler: Progress (or lack of it) of the government’s new scheme oriented to support the lira via protected time deposits. Constant government pressure on the CBRT vs. bank’s credibility/independence. Bouts of geopolitical concerns. Structural reforms. Earlier Presidential/Parliamentary elections?

USD/TRY key levels

So far, the pair is gaining 0.20% at 14.6461 and a drop below 14.5217 (weekly low Mar.15) would expose 13.7063 (low Feb.28) and finally 13.5091 (low Feb.18). On the other hand, the next up barrier lines up at 14.9889 (2022 high Mar.11) seconded by 18.2582 (all-time high Dec.20) and then 19.00 (round level).

Ukraine has reportedly rejected Russian claims that it was open to adopting a model of neutrality comparable to Sweden in peace talks, reported the Independent on Wednesday. Russian negotiators said that Kyiv had offered to become a de-militarised state, but Ukraine responded by saying that it needs “legally verified security guarantees” and would not accept any other model.

• The US dollar treads water above 0.9400.
• Hopes about peace talks and China's stimulus measures have lifted market sentiment.
• The USD/CHF is teetering above trendline support at 0.9390.|

The US dollar’s rally from early-March lows near 0.9150 seems to have lost steam on Friday. The pair has been trading sideways around the 0.9400 mark on Wednesday, lacking direction with investors' focusing on the conclusion of the Federal Reserve’s monetary policy meeting.

The greenback loses steam in a risk-on session

Financial markets are witnessing a certain risk revival on Friday, with Asian and European stock markets posting solid gains. Upbeat news from the Russia – Ukraine peace talks and the announcement of a new economic stimulus in China have buoyed stock markets, favoring the euro and pound and weighing on the USD, despite market expectations of a Fed rate hike later today.

Russian Foreign Minister, Sergey Lavrov said earlier on Wednesday that he is hopeful about a mutual compromise. On the other end of the table, Ukrainian Prime Minister, Volodymyr Zelenski, affirmed that talks sound more realistic, although more time is needed. These comments have boosted optimism for an agreement that might end the war.

In China, Vice-Premier Liu He announced that Beijing is set to roll out measures to support economic growth and keep capital markets stable. This has boosted confidence among Asian investors.

USD/CHF treads water above 0.9400, testing trendline support

From a technical perspective, the pair is now teetering right above the support trendline from early March lows, now at 0.9390.

A confirmation below that line might cancel the near-term bullish momentum and, send the pair towards the 100-hour SMA at 0.9360, which has offered support previously, before aiming for March 14 low at 0.9320.

On the upside, immediate resistance lies at 0.9415, and above here, 0.9430 (March 15 high) before setting sail to attack April 2021 high at 0.9470.

USD/CHF hourly chart

EUR/CHF remains well supported following its strong rebound from parity. Analysts at Credit Suisse expect the pair to extend its recovery to its 55-day moving average (DMA) and 61.8% retracement of the February/March collapse at 1.0370/87.

Initial support is seen at 1.0292

“With daily MACD momentum having turned higher this suggests the recovery should extend further yet for a test of the 55-DMA and 61.8% retracement of the February/March collapse at 1.0370/87.”

“We would then look for the 1.0370/87 to prove a much tougher barrier and for this to ideally cap to define the top of a broader rage. Should strength directly extend though, we see resistance next at the 38.2% retracement of the March-21/March-22 fall at 1.0423.” 

“Support is seen at 1.0292 initially, then 1.0258, which we look to now try and hold. Below 1.0186/77 though remains needed to ease the immediate upside bias for a fall back to support seen next at 1.0159, then 1.0112.”

A generally managed deprecation is the most likely trajectory for USD/CNY in the coming year, in the view of economists at Commerzbank. They forecast that the USD/CNY pair will reach 6.70 by the end of 2022.

A weakening bias for CNY

“We are seeing depreciation pressure for the Chinese currency over the coming year. The Chinese economy is set to slow further as the property softness and Covid-induced consumption weakens remain the key drag.”

“A strong dollar due to policy tightening is likely to the main them in the coming years, while China has much smaller room to maneuver which implies a downside risk for the Chinese currency.”

“We forecast 6.7 and 6.8 for USD/CNY at year end of 2022 and 2023 respectively.”

USD/CHF has seen a sharp move higher. In the opinion of economists at Credit Suisse, the pair may be seeing the beginning of a medium-term shift higher with next resistance at the 2021 high and 50% retracement of the 2019/2021 fall at 0.9473/97.

Support for a potential correction is seen at the November high of 0.9370

“We shift our view to tactically bullish for an eventual test of the 2021 high at 0.9473. A clear and sustained break above here should reinforce thoughts of a medium-term uptrend with resistance then seen next at the 50% retracement of the 2019/2021 fall at 0.9497, then the 200 -week average at .9533/36, with the mid-June 2020 high at 0.9554.”

“Support for a potential correction is now seen at the broken November high at 0.9373/70 initially, which ideally holds to maintain the immediate strong upward pressure. A close below here would warn of a move back to the broken April downtrend at 0.9330/26, which we expect to hold.”

Despite its recovery in recent sessions, the Swedish krona remains the worst performing G10 currency in the year to date. Economists at Rabobank have a fair amount of confidence that the Riksbank will be pivoting towards a less dovish policy stance, providing a tailwind for the SEK.

SEK to remain reactive to headlines regarding the conflict in Ukraine

“Expectations that the Riksbank has little option but to adopt a less dovish tone going forward are SEK supportive.”

“On balance we have adjusted lower our three-month EUR/SEK forecast to 10.40. While there is scope for a stronger SEK, we recognise that the actual path for the currency will be hugely contingent on the war.”

GBP/USD drifts higher ahead of the Federal Reserve's all-important interest rate decision while on Thursday, the Bank of England will hold its March monetary policy meeting. Economists at Scotiabank expect a hawkish Fed and a cautious BoE, which should drag the cable down to 1.28. 

BoE to deliver a more apprehensive hike than the Fed

“A 25bps hike by the Fed will be matched by the BoE tomorrow but the outlook for the remainder of the year is clearly tilted in the USD’s favour as the BoE may only deliver as much as an additional 75bps by end-2022 compared to up to 175bps more from the Fed.”

“The balance of economic risks will also see the BoE deliver a more apprehensive hike than the Fed, with the UK economy (household spending in particular) more susceptible to the impact of higher energy and food prices resulting from the war in Ukraine.”

“The GBP could aim for a test of 1.28 over the next few days/weeks on the combination of a hawkish Fed and a cautious BoE.”

See – Fed Preview: Forecasts from 14 major banks, raising rates but with a huge asterisk related to the war

Ukraine and Russia have made significant progress towards a potential 15-point peace plan that would include a ceasefire and Russian withdrawal from Ukraine if Kyiv declares neutrality and accepts limits on its military forces, the FT reported citing sources. The deal, which the FT said was discussed in full for the first time on Monday, would see Ukraine renounce its ambition to join NATO and promise not to host foreign military bases or weaponry in exchange for protection from Western allies. 

EUR/USD extends the weekly rebound further north of the key barrier at 1.10 ahead of the Federal Reserve's all-important interest rate decision. A hawkish outcome could drag the pair down to test the 1.08 level, economists at Scotiabank report.

EUR/USD could test 1.11 on a cautious hike

“The EUR/USD pair will trade cautiously ahead of the Fed’s policy decision that we expect will kick off a sharp widening of short-rate differentials that will act against the EUR versus the USD.” 

“A more hawkish than expected decision should pull EUR/USD under the 1.09 mark toward a re-test of 1.08 over the balance of the week, while a cautious hike could see the pair aim for a test of 1.11 – although we think the trend remains negative with the Fed set to generally meet market expectations through 2022.”

See – Fed Preview: Forecasts from 14 major banks, raising rates but with a huge asterisk related to the war

• Silver prices trade in the red for a fourth successive session as risk appetite recovers and yields rise.
• XAG/USD bears will likely be eyeing a test of the 50 and 200DMA near $24.00 on a hawkish Fed surprise.

Weaker than expected US Retail Sales figures for February failed to give the precious metals complex a lift on Wednesday, with spot silver (XAG/USD) prices trading in the red for a fourth straight session. Risk appetite has been recovering on Wednesday, with global equities firmly on the front-foot amid a more constructive tone to Russo-Ukraine rhetoric (though the fighting in Ukraine shows no sign of letting up), and as energy and other commodity prices ease.

XAG/USD failed an earlier attempt to push above the $25.00 per troy ounce level and has since slipped back to the $24.80 region, where it trades lower by about 0.3% on the session, despite the weaker US dollar. There has been a lot of focus on the steep rise in US bond yields in recent days which has coincided with the sharp recent pullback in silver from its recent highs in the $26.00s. Higher yields reduce the appeal of holding non-yielding assets like precious metals.

Silver continues to trade above its weekly lows printed on Tuesday in the $24.50s and seems to have entered its typical pre-FOMC wait-and-see mode. The central bank is expected to lift interest rates by 25bps. The main market focus will be on the bank’s new economic forecasts and dot-plot, as well as Fed Chair Jerome Powell’s tone in the press conference. Investors are keen to measure the degree to which Powell will be willing to continue tightening policy in order to control inflation even in the face of slowing growth as a result of recent geopolitical events.

Given past remarks, analysts are leaning towards Powell choosing to control inflation at the expense of growth, rather than towards choosing to support growth at the expense of inflation, meaning hawkish risk. With XAG/USD now below its 21-Day Moving Average near $24.90, some short-term bearish speculators will be eyeing whether prices can fall all the way back to the 50 and 200DMAs in the $24.00 area in the coming days.

• DXY extends the weekly decline to the 98.50/45 band.
• US Retail Sales expanded 0.3% MoM in February.
• The Fed is forecasted to hike rates by 25 bps later on Wednesday.

The US Dollar Index (DXY), which gauges the greenback vs. a bundle of its main rivals, remains depressed around the mid-98.00s on Wednesday.

US Dollar Index offered ahead of Fed decision

The index retreats to 3-day lows in the 98.50 area, as investors continue to favour the risk complex in detriment of the greenback ahead of the key FOMC event due later in the NA session.

The Fed, in the meantime, is largely expected to raise the Fed Funds Target Range by 25 bps at its gathering later in the NA session, while the balance sheet runoff and the interest rate path are also predicted to be in the centre of the debate at Powell’s press conference.

Some mildly positive news from the Russia-Ukraine front leaves the upbeat mood in the risk-associated universe intact so far, although volatility is seen gathering pace as markets get closer to the Fed meeting.

In the docket, nothing to write home about after Retail Sales disappointed expectations following a 0.3% monthly expansion in February. In addition, Business Inventories rose 1.1% MoM in January and the NAHB Index deflated to 79 for the current month.

What to look for around USD

The index intensifies the correction from recent peaks in response to the tepid optimism surrounding the Russia-Ukraine peace dialogue along with the persistence of the sentiment towards the risk-linked galaxy. However, the leg lower in the buck is deemed as temporary amidst the current uncertain context around the war in Ukraine, while bouts of risk aversion should prop up inflows into the safe havens and lent legs to the dollar at the same time. Also supportive of the stronger buck appears the current elevated inflation narrative, the start of the Fed’s normalization of its monetary conditions later this week and the solid performance of the US economy.

Key events in the US this week: Retail Sales, Business Inventories, NAHB Index, FOMC Meeting, Powell press conference (Wednesday) – Building Permits, Housing Starts, Philly Fed Index, Initial Claims, Industrial Production (Thursday) – CB Leading Index, Existing Home Sales (Friday).

Eminent issues on the back boiler: Escalating geopolitical effervescence vs. Russia and China. Fed’s rate path this year. US-China trade conflict. Futures of Biden’s Build Back Better plan.

US Dollar Index relevant levels

Now, the index is losing 0.37% at 98.64 and a break above 99.29 (high Mar.14) would open the door to 99.41 (2022 high Mar.7) and finally 99.97 (high May 25 2020). On the flip side, the next down barrier emerges at 98.45 (weekly low Mar.16) followed by 97.71 (weekly low Mar.10) and then 97.44 (monthly high Jan.28).

• USD/JPY was seen consolidating its recent strong gains to the highest level since January 2017.
• The heavy intraday USD selling capped the upside amid extremely overbought conditions.
• The risk-on undermined the safe-haven JPY and extended support amid elevated US bond yields.
• The market focus remains glued to the outcome of a two-day FOMC monetary policy meeting.

The USD/JPY pair struggled to gain any meaningful traction and remained confined in a range just below the multi-year high, around the 118.30 region through the early North American session.

The pair witnessed subdued/range-bound price move on Wednesday and consolidated its recent strong gains to the highest level since January 2017. The US dollar witnessed heavy selling amid some repositioning trade ahead of the FOMC policy decision and acted as a headwind for the USD/JPY pair. That said, a combination of factors helped limit the downside for the major, at least for now.

Against the backdrop of hope for a diplomatic solution to end the war in Ukraine, China's government promised to support the financial markets and boosted investors' confidence. This, in turn, triggered strong rally in the global equity markets, which undermined the safe-haven Japanese yen. This, along with the divergence in the BoJ-Fed policy outlooks, extended support to the USD/JPY pair.

The markets have fully priced in the prospects for an imminent start of the policy tightening cycle by the Fed, which was evident from the recent sell-off in the US money markets. In fact, the yield on the benchmark 10-year US government bond shot to the highest level since June 2019. Conversely, the Bank of Japan (BoJ) is expected to maintain the accommodative stance at its meeting on Friday.

The fundamental backdrop favours bullish traders and supports prospects for a further near-term appreciating move for the USD/JPY pair. Investors, however, preferred to wait for the outcome of a two-day FOMC monetary policy meeting, scheduled to be announced later during the US session. Apart from this, overbought conditions further held back traders from placing aggressive bullish bets.

Technical levels to watch

Russian President Vladimir Putin on Wednesday reiterated that he had no other option for the security of Russia than conducting the special military operation in Ukraine, reported Reuters. Ukraine could have had nuclear weapons in the foreseeable future and, backed up by Western powers, was planning aggression against Russia, Putin stated. We do not want to occupy Ukraine, he added and criticised Western media for failing to report on the attacks made by Ukraine in the Donbas region. 

All of our tasks in Ukraine will be achieved and the operation is going to plan, Putin said, though he added that Russia is ready for talks. Putin said that Western powers who want to create "anti-Russia" sentiment do not are about the Ukrainian people.

Putin noted that Western countries face rising energy costs and that these problems will only increase. Who will answer for the millions of deaths in poorer countries, Putin asked. Putin said that the US and EU have effectively declared default onto Russia and that the arrest of Russia assets abroad is a lesson for Russian businesses.   

Ukrainian President Volodymyr Zelenskyy on Wednesday, in an address to the US Congress, said that if a US/NATO enforced no-fly zone in Ukraine is too much to ask, Ukraine needs planes and air-defense systems, reported Reuters. Zelenskyy appealed to US lawmakers to remember Pearl Harbour and the 9/11 attacks when thinking of Ukraine and called on Congress to do more on sanctions, including on Russian politicians supporting the Ukraine invasion. Zelenskyy urged all businesses to leave Russia. 

Gold is undergoing a sharp setback after being capped near exactly at its $2075 record high. However, strategists at Credit Suisse still expect the yellow metal to break above here towards the $2,285/2,300 zone.

Weakness seen as temporary while above $1,863

“Gold has been capped at its $2,075 record high but our bias is to view this as a temporary setback whilst support for the 55-day average at $1,863 holds on a closing basis.”

“We look for a sustained break above $2,075 in due course with resistance seen at $2,120 initially ahead of $2,167 and eventually our new core upside objective at $2,285/$2,300.”

• GBP/USD is higher but hovering just under 1.3100 amid better risk appetite pre-FOMC and BoE meetings.
• Russo-Ukraine rhetoric has been a little more constructive, lifting sentiment, and US retail sales data was weak.

Whilst pre-Fed policy announcement caution is likely preventing the pair from pushing above 1.3100 and from opening the door to a run higher towards 1.3200, GBP/USD continues to trade firmly on the front foot in the 1.3090 area. Cable is about 0.4% higher, lifted alongside a broad rebound in risk appetite on Wednesday that reflects the more constructive turn in Russia/Ukraine talks as of late, as well as the associated continued pullback in commodity prices. The latest weaker than expected US Retail Sales report likely hasn’t helped the US dollar’s case, while sterling may be continuing to derive some benefit from Tuesday’s decent UK jobs data.

Ukrainian President Volodymyr Velenskiy said on Wednesday that while more time is needed, talks with Russia were sounding more realistic and has been emphasising that Ukraine understands it cannot join NATO. Russian officials have hinted that an agreement could be near. Whether GBP/USD can sustain/extend its recent rally from weekly lows just above 1.3000 on Wednesday will depend on the upcoming Fed meeting.

The central bank is expected to lift interest rates by 25bps. The main market focus will be on the bank’s new economic forecasts and dot-plot, as well as Fed Chair Jerome Powell’s tone in the press conference. Investors are keen to measure the degree to which Powell will be willing to continue tightening policy in order to control inflation even in the face of slowing growth as a result of recent geopolitical events.

Analysts noted that pre-BoE policy announcement (on Thursday) caution as likely holding sterling back from reaping risk-on gains as strongly as some of its peers. With more twists and turns in the Russo-Ukraine story likely ahead and a barrage of incoming, GBP/USD traders will need to be on their toes.

• A combination of factors dragged USD/CAD to over a one-week low on Wednesday.
• An uptick in crude oil prices, stronger Canadian CPI reported benefitted the loonie.
• The risk-on impulse, dismal US Retail Sales data undermined the safe-haven USD.
• The focus remains glued to the highly-anticipated FOMC monetary policy meeting.

The USD/CAD pair continued losing ground through the early North American session and dropped to a one-and-half-week low, around the 1.2685 area following the release of Canadian/US macro data.

The pair witnessed heavy selling for the second successive day on Wednesday and has now retreated nearly 200 pips from the overnight swing high, around the 1.2870 region. The downfall was sponsored by a broad-based US dollar weakness and an uptick in crude oil prices, which tend to benefit the commodity-linked loonie.

Hopes for a diplomatic solution to end the war in Ukraine, along with the Chinese government's promise to support stability in the stock market, boosted investors' confidence. This was evident from a strong rally in the global equity markets, which drove flows away from traditional safe-haven assets and weighed on the greenback.

The USD bulls failed to gain any respite from softer-than-expected US monthly Retail Sales data, which showed a plunge in consumer spending during February. In fact, the headline sales recorded a modest 0.3% growth during the reported month, marking a sharp deceleration from the previous month's upwardly revised reading of 4.9%.

Adding to this, sales excluding autos also missed expectations and rose just 0.2% in February as against the 4.4% surge recorded in the previous month (revised higher from 3.3% reported earlier). The data did little to ease the bearish pressure surrounding the buck, though elevated US Treasury bond yields helped limit losses.

Conversely, the Canadian dollar drew support from strong domestic consumer inflation figures. In fact, the headline CPI edged higher to 1% in February and the yearly rate accelerated to 5.7% from the 5.1% previous. More importantly, the Bank of Canada's Core CPI, which excludes volatile food and energy prices, shot to a 4.8% YoY rate.

With the key economic releases out of the way, the market focus shifts back to the outcome of a two-day FOMC monetary policy meeting. The Fed is scheduled to announce its decision later during the US session, which will influence the USD demand. This, along with oil price dynamics, should provide a fresh impetus to the USD/CAD pair.

Technical levels to watch

• AUD/USD gained strong traction on Wednesday and recovered further from the two-week low.
• The risk-on impulse undermined the safe-haven USD and benefitted the perceived riskier aussie.
• Softer US Retails Sales data failed to impress the USD bulls or provide any impetus to the major.
• The market focus remains glued to the outcome of a two-day FOMC monetary policy meeting.

The AUD/USD pair maintained its bid tone through the early North American session and held steady around mid-0.7200s following the release of the US Retail Sales data.

Following an early dip to the 0.7180 region, the AUD/USD pair attracted fresh buying on Wednesday and built on the previous day's modest bounce from the two-week low. Hopes for a diplomatic solution to end the war in Ukraine, along with the Chinese government's promise to support stability in the stock market, boosted investors' confidence. This, in turn, prompted aggressive intraday selling around the safe-haven US dollar and benefitted the perceived riskier aussie.

On the economic data front, the US Retail Sales growth decelerated sharply and climbed 0.3% in February as against the 0.4% anticipated. Excluding autos, core retail sales also fell short of market expectations and recorded a modest rise of 0.2% during the reported month. The softer prints, however, were offset by an upward revision of the previous month's already strong readings, though failed to impress the USD bulls or provide any impetus to the AUD/USD pair.

Investors also seemed reluctant to place aggressive bets and preferred to wait for the outcome of a two-day FOMC monetary policy meeting. The Fed is scheduled to announce its decision later during the US session and kick start the policy tightening cycle. Investors will also look for fresh clues about the pace of future interest rate hikes. This will influence the near-term USD price dynamics and help determine the next leg of a directional move for the AUD/USD pair.

Technical levels to watch

• Headline Canadian inflation hit 5.7% YoY in February, above the 5.5% expected. 
• The loonie saw some momentary strength in wake of the latest hotter than expected inflation figures. 

Canadian inflation hit 5.7% YoY in February, according to Statistics Canada's latest headline Consumer Price Index (CPI) release on Wednesday. That was above the expected rise to 5.5% from 5.1% in January. The MoM increase in the headline CPI in February was 1.0%, a little above the 0.9% expected and above January's 0.9% reading. 

The Bank of Canada's Core Price Index rose at a YoY rate of 4.8% in February, above the 4.5% expected and last month's 4.3% reading. That was driven by a higher than expected 0.8% MoM price increase, in line with the pace of price gain seen in January. 

Median CPI rose to 3.5% YoY in February from 3.3% a month earlier, Trimmed CPI was up to 4.3% from 4.0% and Common CPI hit 2.6%, a tad above the 2.4% expected print and above January's 2.3% reading. That meant the average of the BoC measures came in at 3.46%, up from 3.2% in January. 

Market Reaction

The loonie saw some momentary strength in wake of the latest hotter than expected Canadian inflation figures, which may increase pressure on the BoC to tighten monetary policy at a quicker pace in the months/quarters ahead. 

Retail Sales in the US rose by 0.3% on a monthly basis in February to $658.1 billion, the data published by the US Census Bureau showed on Wednesday. This reading fell short of the market expectation for an increase of 0.4%. On a positive note, January's print got revised higher to 4.9% from 3.8%. 

"Total sales for the December 2021 through February 2022 period were up 16.0% from the same period a year ago," the publication further read. "The December 2021 to January 2022 percent change was revised from up 3.8% to up 4.9%."

Market reaction

Market participants showed little to no reaction to this report. As of writing, the US Dollar Index was down 0.45% on a daily basis at 98.58.

• EUR/USD remains bid and advances for the third straight day.
• Extra gains keep targeting the weekly peak at 1.1121.

EUR/USD extends the weekly rebound further north of the key barrier at 1.1000 on Wednesday.

In case bulls push harder, then the pair could extend the recovery to the weekly top at 1.1121 (March 10) ahead of the interim hurdle at the 55-day SMA at 1.1255. The selling pressure is seen alleviated once the pair clears the 6-month resistance line, today near 1.1280.

The negative outlook for EUR/USD is expected to remain unchanged while below the key 200-day SMA, today at 1.1541.

EUR/USD daily chart

• A broad-based USD weakness exerted prompted some selling around USD/CHF on Wednesday.
• The risk-on impulse undermined the safe-haven CHF and helped limit any meaningful decline.
• The market focus remains glued firmly to the much-awaited FOMC monetary policy decision.

The USD/CHF pair remained on the defensive heading into the North American session and was last seen hovering just a few pips above the daily low, around the 0.9400 mark.

The pair edged lower on Wednesday and snapped four successive days of the winning streak, stalling its recent strong bullish run to the highest level since April 2021 amid a broad-based US dollar weakness. In the absence of a fresh trigger, traders opted to take lighten their bullish USD bets ahead of the highly-anticipated FOMC monetary policy decision. That said, the risk-on impulse undermined the safe-haven Swiss franc and helped limit any deeper losses for the USD/CHF pair, at least for the time being.

Despite the lack of progress in the Russia-Ukraine ceasefire talks, investors remain optimistic about the possibility of a diplomatic solution to end the war. This remained supportive of the prevalent risk-on mood across the global equity markets, which drove flows away from traditional safe-haven assets. Apart from this, the prospects for an imminent start of the policy tightening cycle by the Fed held back bearish traders from placing aggressive bets and extended some support to the USD/CHF pair.

The markets seem convinced that the recent geopolitical developments might do little to hold back the Fed from hiking interest rates to combat high inflation. This was seen as a key factor that pushed the yield on the benchmark 10-year US government bond to the highest level since June 2019. Hence, the focus will remain on the outcome of a two-day FOMC policy meeting, which will influence the near-term USD price dynamics and help determine the next leg of a directional move for the USD/CHF pair.

Technical levels to watch

• DXY accelerates losses to the 98.50 region on Wednesday.
• Further weakness could drag the index to the 97.70 area.

DXY comes under further selling pressure and adds to the weekly leg lower in the 98.50 zone midweek.

Considering the recent price action in the dollar, further retracement in DXY now carries the potential to extend to the weekly low at 97.71 (low March 10), where some initial contention is expected to emerge.

The current bullish stance in the index, however, remains supported by the 6-month line, today around 95.85, while the longer-term outlook for the dollar is seen constructive while above the 200-day SMA at 94.43.

DXY daily chart

Canada CPI Overview

Statistics Canada will release the latest consumer inflation figures for February later during the early North American session on Wednesday, at 12:30 GMT. The headline CPI is expected to rise 0.9% during the reported month and the yearly rate is anticipated to accelerate to 5.5% from the 5.1% reported in January.

More importantly, the Bank of Canada's Core CPI, which excludes volatile food and energy prices, is anticipated to edge lower to 0.6% in February from 0.8% in the previous month. The yearly rate is expected to remain well above the central bank's upper target and rise from 4.3% in January to 4.5% during the reported month.

How Could it Affect USD/CAD?

Ahead of the key data, an uptick in oil prices underpinned the commodity-linked loonie and dragged the USD/CAD pair to a fresh weekly low, around the 1.2700 mark, amid a broad-based US dollar weakness. Stronger domestic CPI print should provide an additional lift to the Canadian dollar and pave the way for a further near-term depreciating move for the major. Conversely, softer reading could provide some respite to bullish traders. That said, any immediate market reaction is likely to remain short-lived as the market focus remains glued to the FOMC decision, scheduled to be announced later during the US session.

From a technical perspective, some follow-through selling has the potential to drag the USD/CAD pair towards the 1.2670-1.2665 support. The next relevant support is pegged near the 1.2630 region ahead of the 1.2600 mark. The latter coincides with the very important 200-day SMA and is closely followed by the monthly low, around the 1.2585 region, which if broken will shift the near-term bias firmly in favour of bearish traders.

On the flip side, any attempted recovery move now seems to confront stiff resistance near the 1.2735-1.2740 region ahead of the daily peak, around the 1.2775 area, and the 1.2800 mark. Sustained strength beyond has should lift the pair back towards the weekly top, around the 1.2870 region. Bulls might then aim to conquer the 1.2900 mark and continue pushing spot prices further towards 2021 high, around the 1.2960-1.2965 region touched in December.

Key Notes

  •   USD/CAD Outlook: 1.2700 holds the key for bulls ahead of Canadian CPI, US Retail Sales and FOMC

  •   USD/CAD: More weakness ahead as oil finds ground near $95.00

  •   USD/CAD refreshes weekly low, eyes 1.2700 ahead of Canadian CPI

About Canadian CPI

The Consumer Price Index (CPI) released by the Statistics Canada is a measure of price movements by the comparison between the retail prices of a representative shopping basket of goods and services. The purchase power of CAD is dragged down by inflation. The Bank of Canada aims at an inflation range (1%-3%). Generally speaking, a high reading is seen as anticipatory of a rate hike and is positive (or bullish) for the CAD.

• EUR/JPY finally surpasses the key 200-day SMA around 130.00.
• The continuation of the uptrend now targets the 131.90 level.

EUR/JPY trades with decent gains for the fourth consecutive session and finally manages to trespass the key 200-day SMA around 130.00.

A convincing move above the 200-day SMA should pave the way for extra gains with the immediate target at the weekly high at 131.90 (February 16) ahead of the 2022 peak at 133.15 (February 10).

In the meantime, while above the 200-day SMA, the outlook for the cross is expected to remain constructive.

EUR/JPY daily chart

US Monthly Retail Sales Overview

Wednesday's US economic docket highlights the release of monthly retail sales figures for February, scheduled later during the early North American session at 12:30 GMT. The headline sales are estimated to have risen by a seasonally adjusted 0.4% during the reported month as against the 3.8% growth recorded in January. Excluding autos, core retail sales probably climbed by 0.9% in February, down from the 3.3% increase reported in the previous month.

How Could it Affect EUR/USD?

Ahead of the consumer spending data, the risk-on impulse in the markets weighed heavily on the safe-haven US dollar and pushed the EUR/USD pair back above the key 1.1000 psychological mark. Weaker-than-anticipated US data would be enough to exert additional pressure on the greenback and lift the pair. Conversely, an upbeat report is more likely to be overshadowed by the latest optimism over a possible diplomatic solution to end the Russia-Ukraine conflict. That said, any immediate market reaction is more likely to remain limited as investors might prefer to wait for the outcome of a two-day FOMC meeting, scheduled to be announced later during the US session.

According to Eren Sengezer, Editor at FXStreet: “The technical picture doesn't provide any clear directional clues in the near term. The Relative Strength Index (RSI) indicator on the four-hour chart moves sideways near 50 and the pair is trading near the 20-period and the 50-period SMAs.”

Eren also outlined important technical levels to trade the EUR/USD pair: “Resistances are located 1.1000 (psychological level, Fibonacci 38.2% retracement of the latest downtrend), 1.1040 (Fibonacci 50% retracement) and 1.1070/1.1080 (100-period SMA, Fibonacci 61.8% retracement).”

“On the downside, supports could be seen at 1.0930 (Fibonacci 23.6% retracement), 1.0900 (psychological level, static level) and 1.0850 (static level),” Eren added further.

Key Notes

 •  US Retail Sales Preview: Relentless shopper may provide dollar-selling opportunity ahead of the Fed

 •  EUR/USD Forecast: Euro to stabilize above 1.1000 on a dovish Fed hike

 •  EUR/USD set to suffer a substantial drop to the 2020 low at 1.0635 – Credit Suisse

About US Retail Sales

The Retail Sales released by the US Census Bureau measures the total receipts of retail stores. Monthly per cent changes reflect the rate of changes in such sales. Changes in Retail Sales are widely followed as an indicator of consumer spending. Generally speaking, a high reading is seen as positive (or bullish) for the USD, while a low reading is seen as negative (or bearish).

"The idea of creating a demilitarised Ukraine like Austria with its own army could be seen as a compromise," a Kremlin spokesperson said on Wednesday, per Reuters citing RIA news agency.

"There will be personal sanctions on the leaders of unfriendly countries," the spokesperson added and noted that the issue of sanctions is currently being discussed in talks with Ukraine.

Market reaction

Risk flows continue to dominate the financial markets after these comments and the Euro Stoxx 600 Index was last seen rising 2% on a daily basis.

Gold price is still on the retreat. Attention is turning to the rate hike decision to be taken by the US Federal Reserve. If FOMC Chairman Jerome Powell's comments on the policy outlook suggest a possible 50 bps hike in the future, the yellow metal could suffer further weakness, strategists at Commerzbank report.

Slump in XAU/USD is excessive given that the Ukraine conflict is still far from resolved

“We regard the slide in the gold price to be excessive given that the war in Ukraine is continuing and the conflict is still far from resolved.”

“It seems certain that the Fed will raise interest rates for the first time since the end of 2018, in all likelihood by 25 basis points. A bigger rate hike by 50 basis points is probably off the table due to the uncertainty generated by the war in Ukraine.” 

“At his most recent testimony before Congress, Fed Chair Powell had hinted that a bigger rate hike of 50 basis points might be possible at some point during the cycle. If Powell were to repeat this comment, gold might come under further pressure despite the interest rate expectations that are already priced in.”

See – Fed Preview: Forecasts from 14 major banks, raising rates but with a huge asterisk related to the war

• A combination of factors exerted downward pressure on USD/CAD for the second straight day.
• An uptick in oil prices underpinned the loonie and prompted selling amid modest USD weakness.
• Traders await Canadian CPI and US Retail Sales for a fresh impetus ahead of the FOMC decision.

The USD/CAD pair added to its intraday losses and dropped to a fresh weekly low, around the 1.2720-1.2715 region during the first half of the European session.

The pair extended the previous day's sharp retracement slide from the multi-day peak, around the 1.2870 region and witnessed some follow-through selling for the second successive day on Wednesday. Crude oil prices regained positive traction and recovered a part of the overnight slump to the lowest level in almost three weeks. This, in turn, underpinned the commodity-linked loonie and exerted downward pressure on the USD/CAD pair amid modest US dollar weakness.

Russian forces have stepped up their aggression and intensified bombardment of Ukrainian cities. This, along with the lack of progress in ceasefire talks, fueled fears about the supply disruptions and acted as a tailwind for oil prices. That said, the resurgence of COVID-19 cases in China has raised concerns about reduced fuel demand. Moreover, hopes for a diplomatic solution to end the war in Ukraine should keep a lid on any meaningful gains for the black liquid.

On the other hand, the risk-on impulse - as depicted by the strong move in the equity markets - drove flows away from the safe-haven greenback, though elevated US Treasury bond yields should limit losses. The markets seem convinced that the Fed would kick start the policy tightening cycle and hike interest rates to combat high inflation. This, in turn, pushed the yield on the benchmark 10-year US government bond to the highest level since June 2019 and favours the USD bulls.

The fundamental backdrop favours bullish traders and supports prospects for the emergence of some dip-buying around the USD/CAD pair. Investors, however, might prefer to wait for the outcome of a two-day FOMC policy meeting, due later during the US session. In the meantime, traders will take cues from the Canadian CPI report and the US Retail Sales data for some impetus. Apart from this, oil price dynamics should allow traders to grab some short-term opportunities.

Technical levels to watch

Turkey’s Finance Minister Nureddin Nebati said on Wednesday, his government “will bring inflation down to single digits by June 2023.”

Further comments

“Will see inflation come down as of summer.”

“Lira protection scheme helps keep the exchange rate in foreseeable levels.”

Market reaction

USD/TRY has caught a fresh bid wave despite the upbeat comments on inflation by the Turkish government official.

The pair is currently trading at 14.72, adding 0.22% on the day.

Many investors are afraid that monetary policies will become highly restrictive in order to fight inflation, and that this will lead to a sharp decline in equity markets. But there are many reasons why central banks are likely to be more cautious today than in the past, leading to much smaller rate hikes, analysts at Natixis report.

Central banks are likely to be cautious

“The much higher level of public debt ratios than in the past means that a rise in interest rates would worsen public finances markedly more than in the past.”

“The much higher level of wealth than in the past means that a fall in asset prices caused by the rise in interest rates would trigger a greater negative wealth effect than in the past, driving down domestic demand.”

“Central banks now have numerous objectives linked to real activity: obtaining a high employment rate to reduce inequality, obtaining high potential growth to reduce debt ratios. A restrictive monetary policy is clearly at odds with these new objectives.”

“Recent developments show that wage indexation to prices remains low. This means that inflationary surges push down real wages and therefore weakens domestic demand, which exempts central banks from having to do so.”

“Central banks are determined to support the energy transition. This requires very large investments (4%s of GDP per year for 30 years), some of which have very low financial returns (they generate climate externalities). For these investments to be made, long-term interest rates must therefore remain low.”

“If inflation comes from negative supply shocks, it is completely counterproductive to raise interest rates, as this hike in interest rates discourages investments that could loosen this supply constraint.”

“The most likely is then a moderate hike in central bank interest rates, with a terminal (stabilised) interest rate of around 2.5% in the US and 1% in the eurozone. This visible but moderate hike in central bank interest rates is unlikely to be a threat to equity markets.”

Economist at UOB Group Ho Woei Chen, CFA, assesses the latest set of data releases in the Chinese economy.

Key Takeaways

“China’s Jan-Feb data surprised strongly on the upside, suggesting that the policy easing measures are working through. Despite the strong start to the year, the Russia-Ukraine conflict and worsening domestic pandemic warrant a more cautious outlook.”

“China’s ‘dynamic zero-COVID’ policy is expected to come at a significant cost to the economy. The question is now the extent of lockdown in terms of the number of cities and duration of the lockdown.”

“In consideration of the increased near-term headwinds, we have lowered our growth forecast for China to 4.9% for 2022 from our previous forecast of 5.2%. We expect to see the impact of the lockdowns and higher commodity prices from Mar with 1H22 GDP likely at around 4.5% y/y before picking up to 5.2% y/y in 2H22.”

“We still maintain our forecast for the benchmark 1Y LPR to fall by another 15bps to 3.55% by the end of 2Q22. There is also possibility for a further cut in the reserve requirement ratio (RRR) to help lower the funding costs for banks.”

The German Economy Ministry said on Wednesday, the “impact of Russia’s invasion of Ukraine on the economy is hard to quantify at moment.”

Additional quotes

EUR/USD reaction

The shared currency failed to find any impetus from these statements, as EUR/USD keeps its range below 1.1000, with eyes on the Fed outcome.

The main currency pair is trading at 1.0990, up 0.35% on a daily basis, as of writing.

• Silver met with a fresh supply in the vicinity of the $25.00 psychological mark on Wednesday.
• Neutral technical indicators on the daily chart warrant caution before placing directional bets.
• Sustained weakness below mid-$24.00s is needed to confirm the near-term bearish outlook.

Silver struggled to capitalize on the previous day's late rebound from the two-week low and met with a fresh supply in the vicinity of the $25.00 mark on Wednesday. The white metal remained on the defensive through the first half of the European session and was last seen around the $24.80 region.

From a technical perspective, the recent pullback from the $27.00 neighbourhood or the highest level since June 2021 stalled near the 50% Fibonacci retracement level of the $22.00-$26.95 move up. This should now act as a key pivotal point and determine the near-term trajectory for the XAG/USD.

The attempted recovery, however, faltered near the 38.2% Fibo. level, around the $25.00 psychological mark. This, in turn, favours bearish traders and supports prospects for further losses. That said, technical indicators on the daily chart are yet to confirm the outlook and warrant some caution.

Hence, it will be prudent to wait for some follow-through selling below the overnight swing low, around the $24.55-$24.50 region before placing aggressive bearish bets. The XAG/USD might then accelerate the downward trajectory towards testing sub-$24.00 levels, or the 61.8% Fibo. support.

On the flip side, momentum back above the $25.00 mark now seems to confront stiff resistance near the 23.6% Fibo. level, around the $25.75-$25.80 region. Some follow-through buying, leading to a move beyond the $26.00 mark should be enough to negate the near-term bearish bias for the XAG/USD.

The next relevant hurdle is pegged near the $26.40 region, above which bulls could make a fresh attempt to conquer the $27.00 mark and push the XAG/USD further towards mid-$27.00s. The momentum could get extended towards the $28.00 mark en-route the May 2021 daily closing high, around the $27.90 area.

Silver daily chart

Technical levels to watch

• EUR/USD remains bid and close to the 1.1000 area.
• Risk-on mood continues to prop up the pair on Wednesday.
• The FOMC meeting will be the salient event later in the session.

Buying interest keeps the European currency supported for yet another session and lifts EUR/USD to the 1.1000 neighbourhood on Wednesday.

EUR/USD: All the attention remains on the Fed

EUR/USD advances for the third consecutive session, although a convincing breakout above the psychological 1.1000 barrier still remains elusive for euro bulls.

The positive streak around the pair comes hand in hand with a mild improvement in the risk complex following the cautious optimism in the geopolitical area regarding a potential diplomatic solution to the war in Ukraine.

The march north in spot also remains underpinned by the strong rebound in German 10y bund yields, which navigate an area last seen back in November 2018 around 0.40%.

Minor releases in the euro docket saw Italian final CPI rise 0.9% MoM in February and 5.7% over the last twelve months.

Across the pond, all the focus will be on the Fed gathering, while Retail Sales take centre stage in the daily docket followed by MBA Mortgage Applications, Business Inventories and the NAHB Index.

What to look for around EUR

The European currency maintains a bid bias and flirts with the 1.1000 zone once again, always on the back of renewed optimism in the risk-linked universe. Pockets of strength in the euro should appear propped up by speculation of the start of a hiking cycle by the ECB at some point by year end, while higher German yields, elevated inflation, the decent pace of the economic recovery and auspicious results from key fundamentals in the region are also supportive of a firmer currency for the time being.

Key events in the euro area this week: ECB Lagarde, EMU Final CPI (Thursday) – EMU Balance of Trade (Friday).

Eminent issues on the back boiler: Asymmetric economic recovery post-pandemic in the euro area. Speculation of ECB tightening/tapering later in the year. Presidential elections in France in April. Impact of the geopolitical conflict in Ukraine.

EUR/USD levels to watch

So far, spot is gaining 0.39% at 1.0997 and faces the next up barrier at 1.1019 (weekly high Mar 15) followed by 1.1121 (weekly high Mar 10) and finally 1.1255 (55-day SMA). On the other hand, a drop below 1.0900 (weekly low Mar 14) would target 1.0805 (2022 low Mar 7) en route to 1.0766 (monthly low May 7 2020).

In its monthly oil market report, the International Energy Agency (IEA) lowered the Q2-Q4 2022 forecast for world oil demand by 1.3 mln bpd amidst the Ukraine crisis.

Additional takeaways

Market reaction

WTI is looking to extend the rebound above the $97 mark on these headlines, gaining 3.50% on the day.

Despite the high risk aversion, the Norwegian krone was able to appreciate in recent weeks. Economists at Commerzbank expect NOK to strengthen in the first half of the year until the European Central Bank (ECB) starts hiking rates in the fall.

Only moderate upside potential for NOK

“Thanks to the restrictive Norges Bank, the Norwegian krone should appreciate against the euro in the first half of the year. In the fall, however, when the ECB implements its first interest rate hikes, the upward trend is likely to stall.”

“Next year, the NOK could gain again some ground against the euro. Although the ECB is also likely to raise its key interest rate again, Norges Bank remains the comparatively more active central bank. In addition, the high oil prices should tend to support the NOK.”

Fitch Ratings said that Russia would default on its two US dollar bond coupon payments due this Wednesday if it makes payments for those coupons in roubles.

"The payment in local currency of Russia's U.S. dollar Eurobond coupons due on 16 March would if it were to occur, constitute a sovereign default, on expiry of the 30-day grace period," Fitch said.

Russia is due to make two hard currency coupon payments of near $117 million on Wednesday, per Reuters.

Market reaction

USD/RUB keeps its rebound intact from weekly lows of 104.00, currently trading at 108.45, posting small gains on the day.

The pair staged a solid recovery and briefly recaptured 117.00 amid a risk-on market profile and optimism over a potential truce between Russia and Ukraine.

The renewed upside in the spot lacks follow-through, as the US dollar remains under heavy selling pressure amid the upbeat mood and ahead of the all-important Fed decision.

The trajectory of the Ukraine war will remain the key driver of EUR/USD performance in the month ahead. Economists at MUFG Bank highlight the key levels to watch depending on how the conflict evolves.

EUR/USD unlikely to surge above 1.12/14

“If the conflict continues to escalate in the month ahead creating greater disruption for the euro-zone economy, then EUR/USD is likely to test and potentially break below the 1.0650 early 2020 lows.”

“If a diplomatic solution is found to bring a quicker end to the conflict then it will set the stage for EUR/USD to rebound. EUR/USD has already climbed back up to the up 1.10-level in recent days. The conflict would need to de-escalate significantly for EUR/USD to trade at higher levels on a sustained basis.” 

“The pair was trading between 1.12 and 1.14 prior to the Ukraine conflict, and it is difficult to see EUR/USD climbing above those levels in the month ahead given that even a short conflict will have left a negative impact on the eurozone economy.”

Despite the elevated geopolitical risks that in times gone past might have lifted the yen there are factors that have prevailed that economists at MUFG Bank believe will continue to prevail and help lift USD/JPY further over the short-term.

Compelling reasons for the yen to remain on a weak footing

“The technical backdrop is very much favouring USD/JPY higher. We have cited the big technical resistance from the long-term downtrend from the highs in 1990 and again in 2015 that could prove strong resistance. That level came in at around 117 and the clear break of that level and the momentum is very much supportive for USD/JPY. This technical break should open up a move to the 120-level.”

“We expect the Fed to signal more monetary tightening than signalled in December (6 hikes versus 3 in Dec) which will help keep USD/JPY underpinned for now.”

“Japan’s trade position is set to deteriorate further. Energy imports make up close to 25% of total imports and the price increases in global markets for crude oil will equate into a larger trade deficit over the coming months.”

“There is increased anticipation that the profound change in the global inflation outlook will trigger a fundamental shift in Japan with the ‘deflation mindset’ often referred to be Governor Kuroda being altered. With the BoJ signalling no change in monetary policy any time soon, this could mean a decline in real yields in Japan, thus helping to fuel further yen depreciation.”

UOB Group’s FX Strategists noted further upside in USD/CNH is expected to meet a tough barrier at 6.4300 in the next weeks.

Key Quotes

24-hour view: “We highlighted yesterday that ‘in view of the impulsive momentum, USD could strengthen further to 6.4050, as high as 6.4100’. Our view turned out to be right as USD rose to 6.4105 during London hours before pulling back sharply. The sharp pullback has dented the upward momentum and USD is unlikely to strengthen further. For today, USD is more likely to trade sideways between 6.3700 and 6.4050.”

Next 1-3 weeks: “We have expected a stronger USD since Monday (14 Mar, spot at 6.3620). As USD surged, in our latest narrative from yesterday (15 Mar, spot at 6.3980), we highlighted that the rally in USD appears to have ample fuel and USD could continue to rally to 6.4100, as high as 6.4300. USD subsequently soared to 6.4105 before pulling back. While upward momentum has eased somewhat, the risk is still on the upside. That said, the next major resistance at 6.4300 may not come into the picture so soon. In other words, USD could consolidate below 6.4105 for 1 to 2 days before heading higher. Overall, only a breach of the ‘strong support’ level at 6.3600 (no change in level from yesterday) would indicate that the current strong upward pressure has eased.”

The Indian rupee came under pressure in the past month due to the spike in oil prices. High crude prices could have negative spillover effects on the economy, exert downside pressure on INR near-term. Therefore, the Reserve Bank of India (RBI) may step up intervention to alleaviete INR weakness

INR under pressure due to oil spike

“The oil price shock due to the Ukraine conflict is presenting RBI with a new set of challenges. The inflation picture is expected to worsen in the short term as input costs rise. The fiscal and current account deficits are also expected to be wider than earlier projections which could exert downside pressure on INR.”

“RBI still has to grapple with slowing growth momentum.”

“We expect RBI to maintain an accommodative stance near term. They could step up INR intervention in order to shore up confidence and not exacerbate the inflation picture.”

Swedish central bank, Riksbank, Governor Stefan Ingves is back on the wires now, via Reuters, expressing his view on inflation and monetary policy.

Key quotes

Market reaction

EUR/SEK has snapped its rebound, falling back towards five-week lows of 10.46. The spot is down 0.43% so far.

• USD/JPY oscillated in a range near the multi-year peak through the early European session.
• The emergence of some USD selling forced bulls to take a breather after the recent run-up.
• A combination of factors continued lending some support as the focus remains on the Fed.

The USD/JPY pair remained confined in a narrow trading band through the first half of the European session and consolidated its recent strong gains to the multi-year peak. The pair was last seen trading around the 118.30-118.35 region, nearly unchanged for the day.

Following the recent bullish run of over 350 pips witnessed since the beginning of the last week, bulls took a breather on Wednesday amid the emergence of some US dollar selling. Apart from this, extremely overbought conditions capped the USD/JPY pair just ahead of the 2017 swing high. That said, a combination of factors continued acting as a tailwind for the pair and supports prospects for additional near-term gains.

Hopes for a possible diplomatic solution to end the war in Ukraine, along with reports that China will keep the stock market stable triggered a fresh wave of the risk-on trade. This was evident from a generally positive tone around the equity markets, which undermined traditional safe-haven assets and weighed on the Japanese yen. Bulls further took cues from elevated US Treasury bond yields, bolstered by hawkish Fed expectations.

In fact, the markets seem convinced that the recent geopolitical developments might do little to hold back the Fed from hiking interest rates to combat high inflation. The prospects for an imminent start of the policy tightening cycle by the Fed pushed the yield on the benchmark 10-year government bond to the highest level since June 2019. This favours the USD bulls and adds credence to the near-term bullish outlook for the USD/JPY pair.

Investors, however, seemed reluctant to place aggressive bets and preferred to wait for the outcome of a two-day FOMC monetary policy meeting, due later during the US session. Heading into the key central bank event risk, traders will take cues from the release of the US monthly Retail Sales data. Apart from this, fresh developments surrounding the Russia-Ukraine saga will be looked upon for some trading impetus around the USD/JPY pair.

Technical levels to watch

Economists at Danske Bank expect the Riksbank to hike rates in September and November and deliver a final hike in February 2023. Therefore, the EUR/SEK pair may fall more than expected throughout the year.

Two hikes in the autumn, a third next spring 

“Our new call with hikes in September and November and then a final hike in February 2023, will lend support to the SEK in the 1-9M perspective even though one can argue that it is, by and large, priced in.”

“There is slight downside risks to our current 1-6M EUR/SEK forecasts (1M 10.70, 3M 10.50, 6M 10.30) stemming from monetary policy.”

“If the Riksbank delivers what is perceived as a final shot in February 2023, it could be accompanied by headwinds for the SEK as markets temper their expectations on how high the repo rate will go and also via slowing growth expectations. Hence, albeit distant and thus very uncertain, we see slight upside risk to our EUR/SEK 12M forecast (10.30).”

• DXY adds to recent gains below the 99.00 yardstick.
• The Fed is expected to hike rates by 25 bps later on Wednesday.
• Retail Sales, Mortgage Applications, NAHB Index also on the docket.

The greenback extends its bearish note and retests the 98.70 region when tracked by the US Dollar Index (DXY) on Wednesday.

US Dollar Index focuses on the Fed, geopolitics

The index loses ground for the third consecutive session so far midweek amidst the better tone in the risk complex, particularly after Russia’s Lavrov suggested there is certain hope in the peace talks with Ukraine.

Other than the geopolitical scenario, investors are expected to closely follow the FOMC event later in the NA session, where the Committee is expected to raise the Fed Funds Target Range by 25 bps, while the future rate path and the balance sheet runoff will surely take centre stage as well.

In the US cash markets, yields in the short end of the curve alternate gains with losses in the upper end of the recent range, while yields in the belly and the long end extend the upside for yet another session to the 2.15% region and the 2.50% zone, respectively.

Other than the FOMC gathering, it will be an interesting session in terms of the US docket, with the releases of Retail Sales, Business Inventories, the NAHB Index and weekly MBA Mortgage Applications.

What to look for around USD

The index sees some correction from recent peaks in response to the mild optimism surrounding the Russia-Ukraine peace dialogue along with the persistence of sentiment towards the risk-associated space. However, the buck's leg lower has been deemed as temporary amidst the current uncertainty around the war in Ukraine, while bouts of risk aversion should prop up inflows into the safe havens and lend legs to the dollar at the same time. Also supportive of the stronger buck appears the current elevated inflation narrative, the start of the Fed’s normalization of its monetary conditions later this week and the solid performance of the US economy.

Key events in the US this week: Retail Sales, Business Inventories, NAHB Index, FOMC Meeting, Powell press conference (Wednesday) – Building Permits, Housing Starts, Philly Fed Index, Initial Claims, Industrial Production (Thursday) – CB Leading Index, Existing Home Sales (Friday).

Eminent issues on the back boiler: Escalating geopolitical effervescence vs. Russia and China. Fed’s rate path this year. US-China trade conflict. Futures of Biden’s Build Back Better plan.

US Dollar Index relevant levels

Now, the index is losing 0.32% at 98.70 but a break above 99.29 (high Mar 14) would open the door to 99.41 (2022 high Mar 7) and finally 99.97 (high May 25 2020). On the flip side, the next down barrier emerges at 97.71 (weekly low Mar 10) followed by 97.44 (monthly high Jan 28) and then 96.51 (55-day SMA).

GBP/USD has broken a cluster of key supports at 1.3173/21. Analysts at Credit Suisse look for further weakness to the 50% retracement of the 2020/2021 uptrend at 1.2855/29.

GBP/USD maintains its break of key support to warn of further potentially significant weakness

“GBP/USD maintains its break below the key 1.3173/21 support cluster, which includes the 38.2% retracement of the 2020/2021 uptrend, 2021 lows and 200-week average and we look for further weakness to next support at the 50% retracement at 1.2855/29.”

“Resistance is seen at 1.3195 initially, then 1.3272/73.”

Despite the recent slide, strategists at UBS see crude prices as being well supported. They expect oil to reach around $125/bbl by June, only gradually declining back to $105 by the end of the year.

Crude is well supported despite drop

“Russian oil exports and production will be impacted by sanctions and select import bans, further tightening global supplies. We expect the hit to Russian oil exports and production to become more apparent later this month.”

“The resulting reduction in global output will be hard to offset, either by other producers or by releases from government stockpiles.”

“Global oil demand is still headed for record highs in the second half of the year. We are still expecting global oil demand to hit a record high in the second of the year, at over 101 million barrels a day.”

“We expect oil to reach around $125/bbl by June, only gradually declining back to $105 by the end of the year. Crude and energy stocks remain a hedge against the conflict in Ukraine.”

Economists at ING expect the Federal Reserve to hike by 25bp today and signal 90bp of extra tightening this year in its Dot Plot projections. The move is fully priced in and it might end up having a contained impact on FX. However, with a lot of optimism in the price, the risks appear tilted to the upside.

Not much support for USD from the FOMC announcement

“We expect the median Dot Plot to signal 90bp of further tightening by the end of the year. We expect Powell to reiterate the Fed’s commitment to fight inflation and to keep the overall policy message firmly on the hawkish side, despite the recent headwinds to growth.”

“We think the Fed message today should confirm that monetary policy is set to prove a medium-term positive for the dollar. That said, barring a major upside surprise in the Dot Plots, we suspect the post-FOMC impact on USD could prove rather contained and short-lived, leaving the dollar somewhat vulnerable to the current risk-on environment.”

“It must be acknowledged that a risk-on environment is mostly hanging on some optimism around peace talks and not on any actual de-escalation, and there is surely a risk that markets have moved too fast too soon towards the optimistic side of the spectrum.” 

“The dollar could struggle to recover today, but with a lot of optimism in the price, the risks appear tilted to the upside.”

See – Fed Preview: Forecasts from 14 major banks, raising rates but with a huge asterisk related to the war

Russian Foreign Minister Sergey Lavrov said on Wednesday, “peace talks with Ukraine aren't easy but there is a certain hope for compromise.”

This comes after Sputnik reported a Russian diplomat saying that they are ready for any format of dialogue on the Ukraine crisis if Ukraine is seeking diplomatic solutions.

Market reaction

The market mood remains lifted on the above comment amid optimism for diplomacy. The S&P 500 futures add 0.90% on the day, recapturing the 4,300 level.

Gold price is closing in on the previous lows of $1,907, with all eyes now on the US Retail Sales and the Fed decision.

As the war continues to have adverse growth implications for Swedish growth, risks rise that markets will unwind the currently very hawkish priced-in monetary policy expectations. Analysts at Credit Suisse are therefore now bearish on the Swedish krona and target 10.80 in EUR/SEK.

NOK/SEK upside potential still intact towards 1.10

“We expect SEK price action to remain a factor of the external risk environment in the near-term. In the medium-term, markets could focus on the local growth story, but we believe the deteriorating growth outlook increases risks of a rapid pullback in priced-in monetary policy expectations. As such, both the external and the internal story look unsupportive for the currency, and we therefore now target EUR/SEK at 10.80.”

“We acknowledge that the ECB is dealing with a similar outlook as the Riksbank, and similar tightening timelines may cap upside in EUR/SEK. As such, we prefer to express our views through NOK/SEK upside, based on the two countries’ divergent monetary policies and terms of trade.” 

“We had targeted 1.1450 in NOK/SEK, but with the cross now having shed all of its post-invasion gains, and Brent crude 25% off last week’s high, we think NOK/SEK upside potential is more limited, likely to 1.10 levels.”

GBP/USD closed the second straight day in positive territory on Tuesday despite losing its bullish momentum near 1.31. The pair is moving sideways near the mid-1.30s ahead of the all-important Fed rate decision. In absence of a major upside surprise, the cable should remain above 1.30, economists at ING report.

Trailing in the recovery

“The pound should continue to find some modest support from the tentative optimism around military de-escalation in Ukraine. Interestingly, GBP is struggling to recoup the war-related losses, unlike other European currencies.” 

“At Thursday’s Bank of England meeting, a rate hike combined with more hawkish language could allow the pound to play catch-up with the benign market environment and trigger some EUR/GBP weakness.”

“Barring a major upside surprise in the FOMC Dot Plots today, cable should hold above 1.3000 for another session.”

See – Fed Preview: Forecasts from 14 major banks, raising rates but with a huge asterisk related to the war

In Russia, analysts at Credit Suisse think that a default scenario, if it were to materialize, is unlikely to have major repercussions for markets outside Russia or for the USD/RUB exchange rate.

Pending coupon payment in focus

“In Russia, credit markets expect a possible failure by the government to pay two Eurobond coupon payments, which are due today (16 March), to pave the way for a default. We think that a default scenario, if materialize, is unlikely to have major repercussions for markets outside Russia or for the USD/RUB exchange rate.”

“While the rouble markets remain dysfunctional we still think that the broad direction of USD/RUB will be determined by the extent of restrictions on Russia’s energy exports.”

USD/CAD made a decisive break below 1.28 on Tuesday. CPI in Canada may help the loonie, according to economists at ING, sending the USD/CAD pair lower to 1.27.

More inflationary pressure in Canada

“Crude and other energy prices remain considerably more elevated than before the Ukraine conflict, and are indeed set to fuel further recovery in the Canadian oil and gas industry, which ultimately bodes well for CAD in the medium-term.”

“Today, we’ll see the February CPI report in Canada, with headline inflation that is expected to accelerate from 5.1% to 5.5%. We think this – along with the Fed’s start of the tightening cycle – should contribute to cementing the market’s expectations that the Bank of Canada will maintain a decent pace (five to six more hikes this year) in raising interest rates, which could endorse the loonie’s good momentum.”

“USD/CAD to re-test 1.2700 today.”

Bank Indonesia (BI) will hold the monthly governor’s board meeting on March, 16-17. Here you can find the expectations as forecast by the economists and researchers of four major banks regarding the upcoming central bank's decision. 

The BI is set to hold its benchmark seven-day reverse repurchase rate unchanged at a record low of 3.50%.

Standard Chartered

“We expect BI to keep the policy rate at 3.5% to anchor IDR stability and inflation expectations. A likely 25bps Fed rate hike next week is fully anticipated by the market and unlikely to trigger volatility. BI may highlight increasing inflation risk due to the Russia-Ukraine crisis, which could accelerate the domestic rise in inflation. That said, we think the nascent recovery, low inflation, government subsidies and a manageable external balance will allow BI to maintain rates for the time being. BI may strengthen its coordination with the government to manage cost-push inflation, especially through domestic food and energy price adjustments. We maintain our call of the first 25bps BI rate hike in Q3-2022 and another 25bps hike in Q1-2023. We see a risk of an additional hike this year if supply-side inflation feeds into higher inflation expectations.”

ANZ

“We expect BI to keep the policy rate unchanged. BI has started to hike the reserve requirement ratio for banks in phases, but the central bank has emphasised that the policy rate will be kept low until there are clear signs of inflation breaching the target. This condition for rate hikes has yet to be met. BI had previously signalled that it expects to start assessing price pressure more thoroughly in Q3 2022, but given recent commodity price moves, any shift in BI’s commentary on inflation will be of particular interest. While our baseline is for BI’s first rate hike to materialise in Q3-2022, the risk of an earlier move in Q2 2022 has climbed, given the upside risks to inflation, the likelihood of further US Fed hikes and BI’s focus on stability.”

ING

“BI is widely expected to keep rates unchanged. Despite the pause, we do expect BI to highlight inflation as a growing concern, with a possible shift in tone to prepare markets for a potential reversal in its stance should the ongoing Russia-Ukraine conflict spark inflationary pressures in the coming months.”

TDS

“BI could highlight that rising commodity prices pose upside risks to its inflation outlook amid the Ukraine war. However, we think BI is not in a rush to hike as downside risks to growth remain.”

Economists at Credit Suisse think a hawkish tilt at Thursday’s the Central Bank of the Republic of Turkey (CBRT) meeting is possible. They continue to expect the central bank to cap USD/TRY gains below 15.00 in the very short-run.

A hawkish surprise in the making?

“A policy rate hike, even a seemingly sizable hike of 500bps, will not change the fact that the policy rate in real terms is very far into negative territory. At the same time, a rate hike would, to some extent, create a sense that the central bank’s reaction function has changed. Putting the two together, with this possible but surprising outcome the lira would be likely to rally somewhat but probably not enough to take USD/TRY back to its pre-Russia-invasion levels (i.e. below 14.00) in a sustainable way.”

“While Brent oil prices sits near $100/bbl it seems to us reasonable to expect USD/TRY to stay below but close to the 15.00 mark. But if oil prices rise to, say, $120/bbl again – the central bank will likely see a need to allow USD/TRY to rise to a new (higher) range – perhaps 15.00-16.00.”

EUR/USD has found a floor at 1.0825. Whilst economists at Credit Suisse continue to look for this to hold for a consolidation phase, the broader risk stays seen lower for an eventual break to expose the 1.0635 low of 2020.

EUR/USD to see to see further temporary consolidation above 1.0825

“We continue to look for 1.0825, the long-term uptrend from early 2017, to hold for now for some consolidation, ideally in a 1.0825/1.1120 range.”

“Big picture, we stay bearish for a clear break in due course for a test of the 2020 low at 1.0635.”

“Above 1.1120/21 can see a deeper recovery, but with tougher resistance still expected at 1.1275.”

Analysts at Credit Suisse now expect USD/CNH to trade gradually higher in a wider range of 6.35-6.55 in the next three months. 

Incremental CNH weakness will likely continue

“As the Fed continues to signal rate hikes to offset high US inflation, we expect incremental CNH weakness against the dollar. However, we still do not expect a large, sudden devaluation of the yuan, as this would possibly lead to financial instability and amplify growth concerns.”

“Now that USD/CNH has traded back to 6.40, we expect USD/CNH will trade higher in a wider range of 6.35-6.55 in the next three months.”

USD/JPY has finally seen a resumption of its core bull trend. Analysts at Credit Suisse maintain a core bullish outlook with their ultimate objective still at 122.90/123.00.

Support at 116.35/10 set to hold

“We maintain our long-held bullish outlook with resistance seen next at the 2018 highs at 118.61/66 and with 122.90/123.00 still our ultimate objective.”

“Support at 116.35/10 now ideally holds, although only a close back below the 55-day average at 115.24 would warn of a ‘false’ break higher.”

AUD/USD edged higher for the second successive day on Wednesday amid modest USD weakness. However, economists at Westpac expect the aussie to decline towards the 0.71 area as the Federal Reserve is widely expected to hike its policy rate later in the day.

Price action is often messy around the FOMC headlines

“Near-term, risks lie towards the 0.7100 area, with the US dollar benefiting from both haven/liquidity demand and what should be a hawkish tone from the FOMC as it delivers the first of many rate rises.” 

“Price action is often messy around the FOMC headlines but the contrast to a wary RBA will be stark, capping AUD/USD.”

See – Fed Preview: Forecasts from 14 major banks, raising rates but with a huge asterisk related to the war

• AUD/USD edged higher for the second successive day on Wednesday amid modest USD weakness.
• The risk-on impulse weighed on the safe-haven USD and benefitted the perceived riskier aussie.
• Elevated US bond yields should limit the USD losses and cap the pair ahead of the FOMC decision.

The AUD/USD pair extended its steady intraday ascent through the early European session and climbed to a two-day high, around the 0.7230-0.7235 region in the last hour.

Following the previous day's two-way price move, the AUD/USD pair attracted some buying near the 0.7180 region on Wednesday and is now looking to build on the momentum beyond the 100-day SMA. A generally positive risk tone undermined the safe-haven US dollar and was seen as a key factor that benefitted the perceived riskier aussie.

Against the backdrop of hopes for a possible diplomatic solution to end the war in Ukraine, reports that China will keep the stock market stable boosted investors' confidence. This was evident from a strong rally in the Asian equity markets, which, in turn, drove flows away from traditional safe-haven assets, including the greenback.

That said, a combination of factors should act as a tailwind for the buck and cap any meaningful upside for the AUD/USD pair, at least for now. Concerns about a further escalation in the Russia-Ukraine conflict should keep a lid on the optimism. This, along with elevated US Treasury bond yields, favours the USD bulls.

The markets seem convinced that the recent geopolitical developments might do little to hold back the Fed from hiking interest rates to combat high inflation. The prospects for an imminent start of the policy tightening cycle by the Fed pushed the yield on the benchmark 10-year government bond to the highest level since June 2019.

Investors might also prefer to wait for the outcome of a two-day FOMC policy meeting, scheduled to be announced later during the US session on Wednesday. This, in turn, might hold back traders from placing aggressive bullish bets around the AUD/USD pair and positioning for any meaningful appreciating move in the near term.

Heading into the key central bank event risk, the US monthly Retail Sales figures might provide some impetus to the AUD/USD pair. Apart from this, traders will take cues from the incoming headlines surrounding the Russia-Ukraine saga, which should influence the broader market risk sentiment and drive demand for the safe-haven USD.

Technical levels to watch

Economists at Credit Suisse maintain a core and long-held bullish outlook from September/October last year and look for the US Dollar Index (DXY) to strengthen further to 100/100.04 next and eventually the top of the five-year range at 102/102.50.

Support at 97.71 ideally holds to maintain an immediate bullish bias

“The DXY remains well supported and we maintain our core bullish outlook for the 78.6% retracement at 100.00/04 next, which we look to cap at first.”

“Big picture, we continue to look for a move to the top of the five-year range at 102.00/102.50.”

“Support at 97.71 now ideally holds to maintain an immediate bullish bias. Below can see a deeper setback to the 55-day average at 96.74, but with fresh buyers expected here.”

The US Federal Reserve will announce its monetary policy decisions on Wednesday, March 16 at 18:00 GMT and as we get closer to the release time, here are the expectations as forecast by analysts and researchers of 14 major banks. 

The Fed is widely expected to hike its policy rate by 25 basis points. Investors will pay close attention to the updated Summary of Economic Projections and FOMC Chairman Jerome Powell's comments on the policy outlook.

ANZ

“We expect the FOMC to revise up substantially its 2022 PCE forecasts. We also expect the Fed will raise rates by 25bps and raise the trajectory of the planned tightening path. Chair Powell will leave the door open for 50bp rate hikes if that is warranted by the data. We also expect some guidance from him on how the Fed will react to the unfolding tragedy in Ukraine. An update on balance sheet normalisation is expected. We expect the Fed to revise down its growth forecasts as higher inflation eats into real disposable income and company profits. However, we expect some offset from higher investment in energy production and renewables.”

Commerzbank

“The Fed will start the upcoming rate hike cycle with a cautious rate step of 25 basis points, and the target range for fed funds will then be 0.25% to 0.50%. If inflation does not calm down as expected in the coming months, the pressure on the Fed to increase the pace of interest rate hikes is likely to rise.”

Westpac

“At the March FOMC meeting, the first 25bp rate hike of this tightening cycle will be delivered to be followed by successive 25bp hikes at the May and June meetings. It is also likely that the Committee will give guidance after this meeting on their intentions with respect to balance sheet normalisation, which we expect to begin in the June quarter. The numerical forecasts and qualitatitve guidance provided by the Committee in March will also be important. In short, these views will guide on the Committee’s expected path into 2023 and beyond, including the timing and height of the cycle peak as well as the risks.”

ING

“The Fed is set to raise interest rates with the consensus firmly settled on a 25bp move. It may not be a unanimous decision with a strong likelihood that two Federal Open Market Committee members will vote for a more aggressive 50bp hike given inflation is already close to 8% and is soon set to test 9% at a time when the economy is growing and creating jobs in significant number. However, the uncertainty created by Russia’s invasion of Ukraine is likely to lead to the majority of the committee backing Powell’s motion. They will also be releasing their updated dot plot diagram of individual projections for interest rates. Currently, the median is for three 25bp rate hikes in total by year-end, but it is likely to end up being much closer to the six hikes markets are fully discounting after this update. However, the Fed is likely to emphasise a need to be ‘nimble’ given the uncertain geopolitical backdrop while acknowledging that the surge in commodity prices not only poses an upside risk for inflation but also a downside risk for growth.”

Danske Bank

“We expect the Fed to raise its policy rate by 25 bps given the strong inflation pressures, which are likely to be further enhanced by the rise in oil prices. We had previously expected a 50 bps hike, but the uncertainty from the war in Ukraine will make the Fed a tad more cautious.”

TDS

“Fed Chair Powell all but gave a green light for a 25bp liftoff in March during his testimony before Congress. The current state of the Fed's dual mandate supports the decision to liftoff. We expect the chairman to also convey the message that despite the ongoing conflict between Russia and Ukraine, the Fed is ready to continue with its process of monetary policy normalization during the rest of the year. The market is well priced for tightening in 2022 but underpriced for 2023. We think risks skew in the USD's favor, particularly with USD/JPY.”

RBC Economics

“Policymakers at the US Federal Reserve are expected to hike the Fed funds target range by 25 basis points – the first increase since 2019 as very low unemployment and firming inflation pressures offset increased geopolitical headwinds tied to the Russian invasion of Ukraine. We expect another four (equal-sized) hikes in 2022 to push the target range to 1.25% to 1.50% by end of year.”

NBF

“The Fed is set to implement its first interest rate hike since 2018, as it begins its battle against surging inflationary pressures. With a 25-basis point hike all but guaranteed, we’ll be more interested in the Fed’s policy stance going forward in light of the Russian invasion of Ukraine. To be sure, a new Summary of Economic Projections is likely to show growth forecasts marked down and inflation forecasts marked up, but the focus will be on the all-important ‘dot plot’. December’s median dot signaled just three 2022 rate hikes but at least one more is likely to be added this month. That said, we don’t see the FOMC converging with the 6-7 rate hikes that the market is now pricing for 2022. We also hope to receive more guidance on the start of quantitative tightening; we expect the process to get underway this summer.”

Deutsche Bank

“Before the invasion we thought a 50bps was likely this week and the problem is that by delaying such a move they may have to do more later. With regards to QT, we anticipate that the Fed will use this upcoming meeting to announce caps determining the maximum monthly runoff and, in May, announce QT that would begin in June. We think we will see USD800bn of runoff this year and an additional USD1.1tn drawdown in 2023, a cumulative reduction we think is roughly equal to between three and four rate increases.”

CIBC

“The Fed will deliver a widely telegraphed quarter-point hike, but its statement will have to sound very hawkish since it needs to justify that move and warn of a lot more to come.”

JP Morgan

“The Fed is gearing up to combat rising price pressures and is set to raise interest rates by 0.25%. We anticipate the Fed will hike less aggressively than markets are currently pricing given the aforementioned growth concerns, but the persistence and breadth of hotter inflation may result in a more extended hiking cycle than was originally penciled in.”

Rabobank

“The FOMC is expected to hike by 25 bps. In subsequent meetings (May, June, July) we expect the Committee to continue hiking 25 bps per meeting. However, by the September meeting, the damage from the Ukraine crisis to the global economy may become a threat to the US economic expansion. The doves in the FOMC are likely to jump from the hiking bandwagon by then and demand a pause. Powell could point to the additional benefit of assessing the impact from the initial four hikes, before resuming the hiking cycle.”

ABN Amro

“We and consensus expect a 25bp hike, taking the target range of the fed funds rate to 0.25-0.50%. We expect a total of seven interest rate rises in the course of 2022, as upside risks to inflation outweigh the downside risks to growth stemming from the Russia-Ukraine conflict.”

Nordea

“We expect the Fed to deliver a 25bp hike without making any technical adjustments to the RRP or IOBR rate. We expect the Fed to signal six hikes through its dot plot for 2022, which is likely to be followed by four hikes in 2023, signalling a terminal of 2.50%-2.75%, slightly above the FOMC’s neutral rate estimate of 2.5%. Summary of Economic Projections (SEP) will show higher inflation, lower growth and lower unemployment. The press conference will be a natural venue for the Fed to provide more details on plans for reducing the size of the balance sheet. Yet we do not expect a formal announcement of the balance sheet run-off before May and a beginning in June. We expect the Fed to eventually use its old playbook with monthly run-off caps of US Treasuries and mortgage-backed securities, which are likely to be USD60bn and USD40bn, respectively.”

FX option expiries for March 16 NY cut at 10:00 Eastern Time, via DTCC, can be found below.

- EUR/USD: EUR amounts        

• 1.1000 1.2b
• 1.1050 728m
• 1.1100 823m
• 1.1150 2.6b

- GBP/USD: GBP amounts        

• 1.3500 747m

- USD/JPY: USD amounts                     

• 117.95 734m

- USD/CHF: USD amounts        

• 0.9115 440m
• 0.9325 770m
• 0.9400 540m

- USD/CAD: USD amounts       

• 1.2600 678m
• 1.2630 405m
• 1.2570 843m
• 1.2700 1.1b
• 1.2775 635m

- EUR/GBP: EUR amounts

• 0.8500 305m

On Tuesday, gold price fell sharply, extending a three-day downtrend. As FXStreet’s Dhwani Mehta notes, March lows remain in sight near $1,900 ahead of the much-awaited outcome of the March Federal Reserve meeting.

Daily chart suggests more pain for XAU/USD

“The Fed is widely expected to hike the key rates by 25bps. Although the world’s most powerful central bank’s outlook on future rate hikes and balance sheet reduction will hold the key amid 40-year high inflation and ongoing Russia’s invasion of Ukraine.”

“The March lows of $1,901 remain on gold sellers’ radars. If that level is breached convincingly then a fresh decline towards the $1,880 demand area could be in the offing. Further south, the bullish 50-DMA at $1,870 could come to the buyers’ rescue.”

“Immediate resistance is seen at the mildly bullish 21-DMA of $1,936, above which bulls will look to recapture the $1,959 trendline support now resistance. The recovery could regain momentum above the latter, recalling bulls to take on the $2,000 mark once again.”

Japanese Finance Minister Shunichi Suzuki said Wednesday, “currencies move on various factors, will not comment on forex.”

Read: Forex Today: Market mood remains upbeat ahead of all-important Fed rate decision

Market reaction

At the time of writing, USD/JPY is holding the lower ground near 118.20, almost unchanged on the day.

The focus remains on the all-important Fed decision for fresh US dollar valuations and yields’ price action.

• A combination of factors assisted GBP/USD to regain positive traction on Wednesday.
• A generally positive tone around the equity markets undermined the safe-haven USD.
• BoE rate hike bets underpinned the British pound and further extended some support.
• Bulls seemed reluctant to place fresh bets ahead of the FOMC and the BoE decisions.

The GBP/USD pair traded with a mild positive bias through the early European session and was last seen hovering near the daily top, just a few pips above mid-1.3000s.

Following the overnight pullback from the vicinity of the 1.3100 mark, the GBP/USD pair attracted some buying for the second successive day on Wednesday and was supported by a combination of factors. A generally positive risk tone undermined the safe-haven US dollar and acted as a tailwind for spot prices. Apart from this, expectations that the Bank of England will hike interest rate for the third time on Thursday benefitted the British pound and further extended support to the major.

Despite the lack of progress in the Russia-Ukraine ceasefire talks, investors remain optimistic about a possible diplomatic solution to end the war. This, along with reports that China will keep the stock market stable and support overseas share listing, overshadowed worries about the resurgence of COVID-19 cases in China and boosted investors' confidence. This was evident from the risk-on impulse in the financial markets, which, in turn, drove flows away from traditional safe-haven assets.

That said, elevated US Treasury bond yields, bolstered by hawkish Fed expectations, should limit the USD losses and cap the GBP/USD pair. The markets seem convinced that the recent geopolitical developments might do little to hold back the US central bank from hiking interest rates to combat high inflation. The prospects for an imminent start of the policy tightening cycle by the Fed pushed the yield on the benchmark 10-year government bond to the highest level since June 2019.

Hence, it remains to be seen if bulls are able to capitalize on the uptick or the GBP/USD pair meets with a fresh supply at higher levels. Meanwhile, the pair's inability to gain any meaningful traction suggests that the BoE rate hike move is fully priced in the markets, suggesting that the path of least resistance is to the downside. That said, it will be prudent to wait for a convincing break below the key 1.3000 psychological mark before positioning for any further near-term depreciating move.

Technical levels to watch

Here is what you need to know on Wednesday, March 16:

Risk flows dominate the financial markets early Wednesday as investors remain hopeful for a diplomatic solution to the Russia-Ukraine crisis and the greenback stays on the back foot. February Retail Sales and Import Price Index data will be featured in the US economic docket ahead of the Federal Reserve's all-important interest rate decision. Consumer Price Index (CPI) data from Canada will be looked upon for fresh impetus as well. Additionally, negotiations between Russian and Ukrainian representatives are set to continue on Wednesday.

US Retail Sales Preview: Relentless shopper may provide dollar-selling opportunity ahead of the Fed.

Russian President Vladimir Putin said on Tuesday that Kyiv was not serious about finding a mutually acceptable solution to the conflict. Although this headline caused investors to turn cautious during the American trading hours, Wall Street's main indexes managed to post decisive daily gains. Mykhailo Podoliyak, one of the Ukrainian representatives, said that there certainly was room for a compromise. Moreover, Ukrainian President Volodymyr Zelenskyy noted in a video statement that negotiations were already sounding more realistic.

Reflecting the risk-positive market atmosphere, China's Shanghai Composite Index gained more than 3% and Japan's Nikkei 225 Index rose 1.6%. In the early European session, US stock index futures are up between 0.3% and 0.8%.

Later in the day, the Fed is widely expected to hike its policy rate by 25 basis points. Investors will pay close attention to the updated Summary of Economic Projections and FOMC Chairman Jerome Powell's comments on the policy outlook.

Fed Interest Rate Decision Preview: Is history a guide?

EUR/USD failed to hold above 1.1000 on Tuesday and ended up closing the day virtually unchanged at 1.0950. The pair stays relatively quiet below 1.1000 early Wednesday.

GBP/USD closed the second straight day in positive territory on Tuesday despite losing its bullish momentum near 1.3100. The pair is moving sideways near the mid-1.3000s in the early European morning.

After losing nearly 2% on Monday, gold fell 1.5% on Tuesday and touched its lowest level in two weeks below $1,910. XAU/USD is consolidating its losses above $1,910 as US Treasury bond yields move sideways.

USD/JPY clings to weekly gains above 118.00 as the JPY struggles to find demand as a safe haven. Kyodo news agency reported earlier in the day that the Japanese government was considering compiling a fresh economic package amid the Russia-Ukraine crisis.

Bitcoin spiked to a six-day high above $41,700 earlier in the day but returned below $40,000. Ethereum is edging higher after posting gains in the previous two days and was last seen rising 1% on the day above $2,600.

According to preliminary readings from CME Group for natural gas futures markets, open interest shrank by around 5.6K contracts on Tuesday following three consecutive daily builds. On the other hand, volume went up by around 35.7K contracts, reversing four daily drops in a row.

Natural Gas: Next on the upside comes $5.20

Tuesday’s downtick in prices of natural gas was in tandem with diminishing open interest, hinting at the idea that further retracements appear unlikely in the very near term. Occasional bullish attempts, in the meantime, keep targeting the monthly high around $5.20 per MMBtu for the time being.

A Russian diplomat is reportedly saying that Moscow is ready for any format of dialogue on the Ukraine crisis if the latter is seeking diplomatic solutions, per Sputnik.

There is nothing further reported on the same.

Risk sentiment remains firmer heading towards the European open, courtesy of a strong rebound in Chinese stocks. The S&P 500 futures are up 0.45% on the day while the US dollar index is meandering in daily lows.

In opinion of FX Strategists at UOB Group, AUD/USD could still head lower and retest 0.7130 in the next weeks.

Key Quotes

24-hour view: “After AUD dropped sharply on Friday, we highlighted yesterday that ‘the rapid decline appears to be overdone and AUD is unlikely to weaken much further’. We added, ‘AUD could dip 0.7170 before the risk of a rebound would increase’. AUD subsequently dipped to 0.7165, rebounded to 0.7228 before easing off to close at 0.7198 (+0.16%). The price action is viewed as part of a consolidation and AUD is likely to trade sideways between 0.7165 and 0.725 for today.”

Next 1-3 weeks: “Our update from yesterday (15 Mar, spot at 0.7205) still stands. As highlighted, downward momentum has improved and the risk has shifted to the downside. However, the rapid decline from late last week appears to be running ahead of itself and further strong decline is unlikely. From here, AUD is likely to edge lower to 0.7130. On the upside, a breach of 0.7285 (‘strong resistance’ level was at 0.7305 yesterday) would indicate that the downside risk has dissipated.”

• Platinum prices picks up bids to refresh intraday high, snaps two-day downtrend to bounce off eight-week low.
• Sluggish markets, mixed signals over Ukraine-Russia talks and easing covid fears in China favor USD pullback.
• Fed eyed for economic projections and Powell’s speech as 0.25% rate is given.

Palladium (XPT/USD) regains the $1,000 mark while extending the bounce off a two-month low, up 1.60% around $1,002 heading into Wednesday’s European session. In doing so, the precious metal cheers softer US dollar prices, as well as cautious optimism in the market.

The US Dollar Index (DXY) extends the previous day’s weakness below 99.00 by the press time, down 0.15% on a day.

It’s worth noting that the DXY losses could be linked to the US Treasury yields’ retreat ahead of today’s Federal Open Market Committee (FOMC). That said, the US 10-year Treasury yields struggle to extend the previous seven-day uptrend around the highest levels since June 2019, making rounds to 2.165% at the latest.

On the other hand, US stock futures join Asia-Pacific equities to portray the market’s optimism as fears of another COVID-19 wave from China ebb due to the recently easing virus infections from the dragon nation. “China reports 1,952 new coronavirus cases on March 15 versus 3,602 a day earlier,” said Reuters.

Elsewhere, China Vice Premier Liu He’s readiness to take measures to boost the economy and mixed updates concerning the Ukraine-Russia talks also contribute to the risk-on mood.

Even so, market players remain cautious ahead of today’s Fed meeting as the 0.25% rate-hike is already given.

Read: Fed liftoff begins tomorrow: How to trade it?

Technical analysis

Unless crossing the 200-DMA level, near $1,010 by the press time, XPT/USD remains vulnerable to test January’s low around $927. It’s worth noting that the $1,000 psychological magnet will offer an intermediate halt during the fall.

CME Group’s flash data for crude oil futures markets noted open interest reversed two consecutive daily pullbacks and rose by around 1.4K contracts on Tuesday. Volume followed suit and increased by around 207.2K contracts after three daily drops in a row.

WTI could still retest $90.00

Prices of the WTI extended the decline to the vicinity of $93.00 mark on Tuesday, new monthly lows. The important decline was on the back of rising open interest and volume, exposing the commodity to further weakness in the very near term and with the next target at the $90.00 mark per barrel.

Swedish central bank, Riksbank, Governor Stefan Ingves predicts a rate-hike before 2024.

“Inflation will most likely rise further,” adds Riskbank’s Ingves during a speech on early Wednesday morning in Asia.

EUR/SEK extends fall towards daily low

Following the news, EUR/SEK prices stretch the latest pullback from intraday high, down 0.14% daily near 10.51 at the latest.

It’s worth noting that the market’s near-term direction remains sluggish of Fed and hence the sellers’ latest dominance remain doubtful.

Read: EUR/SEK to slide below 10.50 on more optimism on the Ukraine war – ING

• WTI hovers around $96.00 after easing around 36% in the last six trading sessions.
• A resurgence of Covid-19 in China may weigh down the demand for oil.
• The upside in oil prices will remain capped on higher oil output from OPEC.

West Texas Intermediate (WTI), futures on NYMEX, has rebounded after hitting a low of $92.37 on Tuesday. The oil prices have attracted some significant bids despite the presence of multiple downside indicators.

The confirmation from the OPEC syndicate to add more oil to the global supply brought an intensified sell-off in the oil prices earlier. The OPEC cartel will use its unused capacity to fix the restricted exports of oil from the Russian economy. The US imposed sanctions on Russian oil after the galloping military activities from Russian rebels in Ukraine. While the other Western leaders chose to trim the dependency on Moscow’s oil gradually.

On the demand side, a resurgence of Covid-19 in China has raised questions over the demand for oil. China is one of the largest consumers of oil and a halt in its manufacturing activities amid the lockdown in Shenzhen and fear of its expansion to other cities may squeeze the demand going forward.

Pressure on the demand front and expansion on the supply front may bring a fresh downside impulsive wave in the oil counter.

Meanwhile, the US dollar index (DXY) is oscillating below 99.00 ahead of the interest rate decision from the Federal Reserve (Fed). It is worth noting that an aggressive interest rate from the Fed may squeeze liquidity in the market and the oil market may find lower demand, which may have a modest impact on the oil prices further.

FX Strategists at UOB Group noted GBP/USD could still breach 1.3000 and extend the drop to the 1.2900 region in the short-term horizon.

Key Quotes

24-hour view: “We highlighted yesterday that ‘while GBP could still edge below 1.3000, waning downward momentum coupled with oversold conditions suggests that a sustained decline is unlikely’. Our expectations did not materialize as GBP rebounded to 1.3089 before easing off to close at 1.3045 (+0.33%). Downward momentum has eased and GBP is likely to consolidate from here, expected to be within a range of 1.3000/1.3100.”

Next 1-3 weeks: “On Monday (14 Mar, spot at 1.3045), we highlighted that GBP could breach 1.3000 and if it can close below this support, it is likely to trigger further weakness to 1.2900. GBP briefly touched 1.3000 during early Asian hours yesterday before rebounding. While shorter-term downward momentum is beginning to wane, a breach of 1.3000 is not ruled out just yet. Only a break of the ‘strong resistance’ at 1.3140 (no change in level from yesterday) would indicate that the weak phase in GBP that started more than 2 weeks ago has come to an end.”

Open interest in gold futures markets shrank for the second session in a row on Tuesday, this time by around 5.6K contracts considering advanced prints from CME Group. Volume, instead, went up by nearly 87K contracts after four consecutive daily pullbacks.

Gold looks supported around $1900

Tuesday’s downtick in gold prices approached the key $1900 mark per ounce troy amidst shrinking open interest, which is indicative that a deeper decline would not be favoured, at least in the very near term.

• EUR/JPY prints four-day uptrend inside a bearish chart pattern.
• MACD signals also hint at the pair’s weakness.
• 200-SMA adds to the downside filters, bulls have a bumpy road to the north.

EUR/JPY struggles to justify the bounce off 200-SMA despite printing mild gains around 129.75 heading into Wednesday’s European session.

The reason could be linked to the cross-currency pair’s failures to defy a one-week-old rising wedge bearish chart pattern, as well as an impending bear cross on the MACD.

It should be noted, however, that the EUR/JPY sellers will need validation from the 200-SMA level of 129.55 to retake control.

Following that, early March’s low near 127.30 may entertain the pair bears before directing them to the theoretical target of 123.50.

Alternatively, an upside break of the stated wedge, near 130.50 at the latest, will escalate the EUR/JPY pair’s run-up towards the mid-February high of 131.90.

In a case where EUR/JPY bulls keep reins past 131.90, the 132.00 threshold and February 2022 peak of 133.15 will be in focus.

Overall, EUR/JPY buyers seem to have tired off late but the fresh selling will need confirmation from the 200-SMA.

EUR/JPY: Four-hour chart

Trend: Fresh declines expected

EUR/USD is still expected to navigate the 1.0870-1.1080 range in the next weeks, suggested FX Strategists at UOB Group.

Key Quotes

24-hour view: “Yesterday, we held the view that EUR ‘is likely to trade sideways within a range of 1.0900/1.1000’. EUR subsequently traded between 1.0924 and 1.1019. The price actions still appear to be part of a consolidation and we expect EUR to trade between 1.0920 and 1.1020 for today.”

Next 1-3 weeks: “There is not much to add to our update from Monday (14 Mar, spot at 1.0930). As highlighted, EUR is likely to trade sideways within a range of 1.0870/1.1080. Looking ahead, if EUR closes below 1.0870, it would likely revisit the major support at 1.0805.”

• Gold price seeks more pain below $1,907.00 ahead of the Fed’s policy announcement.
• The DXY and US Treasury yields are also trading lower on active risk-on impulse.
• A bearish crossover from 20 and 50-period EMAs adds to the downside fillers.

Gold (XAU/USD) is falling sharply as investors are dumping the asset on skyrocketing odds of an interest rate hike by the Federal Reserve (Fed). The precious metal is hovering around $1,917.00 on Wednesday. Gold prices have witnessed a fall of almost 7.4% from their recent highs at $2,070.54 last week.

The Fed will announce the interest rate decision on Wednesday and a rate hike is imminent amid the soaring inflation. But the fact is, investors are eyeing the scale of a rate hike to adjust their positions in respect to the precious metal. A 25 basis point (bps) rate hike by the Fed may not have a serious impact on the gold prices as the market participants are aware that only a rate hike is the remedy to curtain the galloping inflation now. However, half of the percent rate hike by the Fed may trigger further short build-ups for the yellow metal.  

Apart from the caution over an aggressive tightening policy after the Fed Open Market Committee (FOMO) meet, improvement in the demand of risk-perceived assets has also trimmed preference for the precious metal. Global equities are trading in the bullish territory despite intensifying fears of Covid-19 in China. Also, fewer headlines from the Russia-Ukraine war have weighed pressure on the gold prices.

Meanwhile, the US dollar index (DXY) has settled below 99.00 after tracing subdued US Treasury yields on Wednesday. The 10-year US Treasury yields are trading at 2.15%, 0.34% down from Tuesday’s close.

Gold Technical Analysis

On a four-hour scale, XAU/USD is trading below 50% Fibonacci retracement (placed from January 28 low at $1,780.75 to March 8 high at $2,070.54) at $1,925.30. The 20-period and 50-period Exponential Moving Averages (EMA) have given a bearish crossover at $1,965.20, which adds to the downside filters.

The Relative Strength Index (RSI) (14) has shifted its range from 40.00-60.00 to 20.00-40.00, which indicates an establishment of a bearish setup.

Gold four-hour chart

Early Wednesday morning in Asia, Reuters shared comments from China Vice Premier Liu He, appeared in Xinhua news, as the diplomat chairs a meeting on economy and capital markets.

Key quotes

Market reaction

AUD/USD renews intraday high of around 0.7215 following the upbeat news, up 0.20% on a day by the press time.

Read: AUD/USD regains 0.7200 as Ukraine-Russia, Fed woes battle China’s upbeat covid news

Although the GBP/USD prices retreat from intraday high, the bulls still keep reins around 1.3050 with mild gains heading into Wednesday’s London open.

That said, one-month risk reversal (RR) of GBP/USD, a gauge of calls to puts, braces for the second weekly run-up, per the latest options market data from Reuters.

While the weekly count is in favor of the GBP/USD bulls with the +0.158 figure, the daily count of -0.050 snaps a two-day winning streak and seems to challenge the cable pair’s latest upside.

However, broad US dollar pullback and a retreat in the US Treasury yields, coupled with cautious optimism over the Ukraine-Russia peace talks and hopes of successive rate hikes from the Bank of England (BOE) keep GBP/USD buyers hopeful ahead of the Fed.

Read: GBP/USD keeps bounce off four-month low around mid-1.3000s ahead of Fed

• USD/IDR reverses early Asian session losses, dropped the most in a week on Tuesday.
• Indonesia FinMin Sri Mulyani Indrawati shrugs off challenges to economy from Ukraine conflict.
• USD tracks softer yields ahead of Fed, receding covid woes in China also favors pair sellers.
• US Retail Sales, risk catalysts can entertain traders ahead of Fed’s verdict.

USD/IDR retreats to $14,309 during the early European morning on Wednesday, following the heaviest daily loss on Tuesday.

The Indonesia rupiah (IDR) pair’s latest losses could be linked to the comments from Indonesia’s Finance Minister (FinMin) Sri Mulyani Indrawati during a virtual seminar with Fitch Ratings, shared by Reuters. Also weighing on the USD/IDR prices could be softer USD ahead of the Federal Open Market Committee (FOMC).

“Indonesia's economy has remained resilient even as the war in Ukraine heightens financial market volatility and drives up commodity prices,” said Indonesia FinMin Mulyani Indrawati per Reuters. “The government would use this year's social protection budget, which amounts to 154.76 trillion rupiah ($10.81 billion), to protect people from an "extreme" rise in food prices,” adds the policymaker.

On the other hand, The US 10-year Treasury yields snap seven-day uptrend around the highest levels since June 2019, down 1.3 basis points (bps) to 2.147% at the latest, which in turn drags the US Dollar Index (DXY) to extend the previous day’s fall below 99.00 by the press time.

The US dollar’s weakness could be linked to the mixed US price and manufacturing data, as well as US inflation expectations, as signaled by the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, which dropped from the second consecutive day after refreshing the record top.

Elsewhere, mixed comments over the Ukraine-Russia peace talks and softer covid daily infections from China also helped the Asian currency to remain firmer of late.

Moving on, Fed’s ability to balance the rate-hike and the US Retail Sales for February, expected to ease to 0.4% from 3.8% prior, will be important for fresh impulse. Further, headlines concerning Ukraine and China’s coronavirus updates will offer additional directions for the USD/IDR prices.

Technical analysis

Unless crossing the 21-DMA level near $14,352, USD/IDR bears are likely to keep reins. That said, December 2021 low of around $14,150 appears a tough nut to crack for bears.

• USD/JPY has tumbled after a double top formation at 118.40.
• Bulls eye a range shift in the RSI (14) at 60.00-80.00 for further upside.
• The trendline placed from 114.65 is limiting the downside risk.

The USD/JPY pair has found some significant offers after hitting an intraday high of 118.40 on Wednesday. The major has witnessed a negative open-rejection reverse price action on Wednesday. The pair opened at 118.31, surged to 118.40 but found intensified selling pressure and slipped below the opening price.

On an hourly scale, USD/JPY has formed a double top as the asset found barricades on the re-test of its previous highs at 118.40. Investors dumped the asset after sensing it was an expensive bet. The trendline placed from March 4 lows at 114.65 adjoining the March 9 low and March 10 low at 115.55 and 115.85 will continue to act as major support going forward.

The Relative Strength Index (RSI) (14) has shifted its range from 60.00-80.00 to 40.00-60.00, which signals no more upside until it oversteps 60.00 again.

For an upside, bulls need to surpass the double top formation at 118.40, which will send the major to a five-year high at 118.66, followed by the 27 January 2016 high at 119.07.

On the flip side, bulls can lose control if the major violates the 30-period Exponential Moving Average (EMA) at 118.17 on the downside. Violation of 30-period EMA will drag the pair to 50-period EMA and 100-period EMA at 117.97 and 117.47 respectively.

USD/JPY hourly chart

• EUR/USD prints three-day winning streak, mildly bid around daily highs of late.
• Receding covid fears from China, mixed concerns over Moscow-Kyiv talks drag Treasury yields, greenback.
• Softer Eurozone data contrasts mixed US economics, pre-Fed anxiety add to the market’s filters.
• Fed’s 0.25% rate hike is less important than the economic projections, Chairman Powell’s speech.

EUR/USD holds onto the week-start recovery near 1.0970, up 0.13% intraday during early Wednesday morning in Asia. In doing so, the major currency pair cheers the US Treasury yields’ retreat ahead of the key Federal Open Market Committee (FOMC).

Mixed US data and easing inflation expectations seemed to have underpinned the US bond coupon’s latest pullback. That said, US Producer Price Index (PPI) matched YoY expectations of 10% growth whereas NY Empire State Manufacturing Index printed the biggest downside since May 2020. On the other hand, US inflation expectations from the record top, as signaled by the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, dropped from the second consecutive day after refreshing the record top.

Elsewhere, cautious optimism over the Ukraine-Russia peace talks and receding covid woes in China also weigh on the US dollar’s safe-haven demand. Recently, mixed comments from Presidents of Russia and Ukraine over the progress of peace talks and the likelihood of any positive results seem to challenge the US stock futures of late.

It’s worth noting that downbeat prints of Eurozone Industrial Production and ZEW sentiment numbers, for January and March respectively, pushed ECB Governing Council member Pablo Hernandez de Cos to accept the challenge for inflation due to the latest geopolitical plays. “Russian's invasion of Ukraine will have adverse consequences on economic activity and increase inflationary pressures,” said the policymaker. On the same line were comments from European Central Bank President Christine Lagarde even if she said that inflation is still forecast to decline gradually and settle near the central bank’s 2% target by 2024.

Against this backdrop, S&P 500 Futures drop 0.18% to 4,257 whereas the US 10-year Treasury yields snap seven-day uptrend around the highest levels since June 2019, down 1.8 basis points (bps) to 2.145% at the latest. That said, the US Dollar Index (DXY) extends the previous day’s weakness below 99.00 by the press time.

Looking forward, EUR/USD buyers are likely preparing for the Fed’s hawkish outcome as 0.25% is widely anticipated. However, any disappointment over economic projections or via Fed Chair Jerome Powell’s speech will help the bulls to overcome nearby hurdles.

Read: Fed Interest Rate Decision Preview: Is history a guide?

Other than the Fed’s verdict, the US Retail Sales for February, expected to ease to 0.4% from 3.8% prior, as well as comments from ECB board member Frank Elderson, will also be important. Additionally, risk catalysts like covid headlines from China and the Ukraine-Russia news will also direct short-term EUR/USD moves, mostly expected to challenge the bulls.

Read: US Retail Sales Preview: Relentless shopper may provide dollar-selling opportunity ahead of the Fed

Technical analysis

Although the weekly support line defends EUR/USD recovery around 1.0940, buyers need validation from a downward sloping resistance line from February 23, close to 1.1040 by the press time, to retake control.

“Extreme end of Ukraine scenario is "an implosion of the economy as a whole,” a United Nations Development Programme (UNDP) Administrator Achim Steiner warned in a Reuters interview on Wednesday.

Key comments

Related reads

• IMF: Russia-Ukraine war “major blow” to world but impact on Asia limited
• Asian Stock Market: Tracks Wall Street gains, Hang Seng leads bulls

• Asia-Pacific equities remain firmer amid cautious optimism over Ukraine-Russia crisis, relief from China’s covid fears.
• Hang Seng rises over 2.0% as Chinese tech shares consolidate recent losses.
• Optimism among Japanese manufacturers propels Nikkei 225, oil recovers as well.
• Fed’s action, geopolitics will be crucial for near-term directions.

Asia-Pacific equities stay on the front foot during early Wednesday as easing covid woes in China helped the shares to track Wall Street’s gains.

Technology stocks in China are the major gainer while Hong Kong’s Hang Seng leads Asia-Pacific bulls with over 2.0% daily upside as Reuters mentions, “China reports 1,952 new coronavirus cases on March 15 versus 3,602 a day earlier.”

Elsewhere, MSCI’s Asia-Pacific shares ex-Japan rises 1.4% whereas Japan’s Nikkei 225 adds over 1.5% by the press time. Earlier in Asia, the Reuters Tankan poll showed that Japanese manufacturers' business confidence improved for the first time in three months in March.

It’s worth noting that Australia’s ASX 200 and New Zealand’s NZX 50 follow gains in China whereas Indonesia’s IDX and South Korea’s KOSPI also didn’t disappoint the regional mood. Further. India’s BSE Sensex is up around 1.5% at the latest amid hopes that the Reserve Bank of India (RBI) will step back from faster monetary policy tightening.

On a broader front, S&P 500 Futures drop 0.18% to 4,257 whereas the US 10-year Treasury yields snap seven-day uptrend around the highest levels since June 2019, down 1.8 basis points (bps) to 2.145% at the latest.

Looking forward, the US Retail Sales for February, expected to ease to 0.4% from 3.8% prior, will join risk catalysts and oil moves will help the global investors to find a clear path.

Read: The Yuan will not replace the US dollar, nor will it be backed by commodities

• USD/CAD eyes more pain amid stabled oil prices.
• The DXY and US Treasury yields are subdued ahead of the Fed’s policy announcement.
• Improvement in the risk appetite is weighing pressure on the safe-haven assets.

The USD/CAD pair has slipped below Tuesday’s low at 1.2762 as oil prices found a likely temporary bottom near $95.00 after easing around 36% from March 8 high at $126.51.

The oil prices are stable at around $97.00 despite the presence of multiple downside catalysts. Right from the assurance from the OPEC cartel to pump more oil to fix the imbalance in the demand-supply mechanism to a resurgence of Covid-19 in China, every catalyst is indicating more weakness in the oil prices. China is one of the largest importers of oil and a situation of lockdown in the dragon economy has imposed a threat on the oil demand. The nation has imposed lockdown in Shenzhen and is likely to extend lockdown restrictions to other cities too in case it fails to contain the current epidemic. The restrictions on the movement of men, materials, and machines may diminish the demand for oil in China.

Meanwhile, the US dollar index is settling below 99.00 after tracking subdued US Treasury yields. Investors are anxious over the announcement of the interest rate decision by the Federal Reserve (Fed) on Wednesday. Therefore, a subdued performance has been witnessed in the above-mentioned assets in today’s session. Adding to that, positive global equities have improved the risk appetite of the investors, which is also weighing pressure on the safe-haven assets.

Apart from the Fed’s monetary policy, Canada’s Consumer Price Index (CPI) numbers are also due on Wednesday. A preliminary estimate for yearly Canada’s CPI is 5.5% against the prior print of 5.1%.

• USD/INR snaps two-day downtrend to rebound from weekly low.
• Oil prices recover from fortnight low on USD retreat, risk-on mood in Asia-Pacific.
• Ukraine-Russia tussles, pre-Fed anxiety weigh on yields, US stock futures.
• Fed’s 0.25% rate-hike is priced in, focus on Powell’s speech and economic projections.

USD/INR extends bounce off weekly bottom, up 0.11% intraday around 76.35-40 during the mid-Asian session on Wednesday. In doing so, the Indian rupee (INR) pair rises for the first time in three while tracking prices of oil.

That said, WTI crude oil prices snap a two-day downtrend while consolidating recent losses around a two-week low, up 2.0% near $95.75 at the latest. Energy bulls seem to have cheered a retreat in China’s daily covid infections and the US dollar pullback to print the latest gains.

That said, stocks in China and Hong Kong lead Asia-Pacific bulls as Beijing reports an easing in the daily covid numbers. “China reports 1,952 new coronavirus cases on March 15 versus 3,602 a day earlier,” said Reuters.

Considering India’s high reliance on oil imports and ballooning trade deficit, an uptick in oil prices weighs on INR and vice versa. It should be noted that the latest outflow of foreign funds also favors the USD/INR buyers. Furthermore, an uptick in India’s daily rise in coronavirus infections to 2,876 from 2,568 also propels the Indian rupee pair.

Elsewhere, mixed comments from Presidents of Russia and Ukraine over the progress of peace talks and the likelihood of any positive results seem to challenge US stock futures of late. Also portraying the market’s anxiety is the easy performance of the US Treasury yields.

Amid these plays, S&P 500 Futures drop 0.18% to 4,257 whereas the US 10-year Treasury yields snap seven-day uptrend around the highest levels since June 2019, down 1.8 basis points (bps) to 2.145% at the latest.

It’s worth noting that, US Producer Price Index (PPI) matched YoY expectations of 10% growth whereas NY Empire State Manufacturing Index printed the biggest downside since May 2020.

Moving on, the US Retail Sales for February, expected to ease to 0.4% from 3.8% prior, will join risk catalysts and oil moves to direct USD/INR traders ahead of the Fed.

Read: Fed Interest Rate Decision Preview: Is history a guide?

Technical analysis

Despite the latest recovery, 10-DMA and one-week-old descending trend line, respectively around 76.50 and 76.58, challenge USD/INR buyers before giving them control.

• USD/TRY juggles around 14.75, bulls are hopeful above 14.84.
• For a fresh rally, the RSI (14) needs to surpass 60.00.
• The 65-period SMA is scaling higher, which add to the upside filters

The USD/TRY pair is continued to oscillate in a narrow range of 14.70-14.76, tracking the price action of Tuesday. The major has turned into a directionless state after a nine-day winning streak.

On a four-hour scale, USD/TRY is forming a bullish flag pattern, which signals back and forth moves after a strong run towards the north and leads to a fresh impulsive if consolidation breaks out decisively.

Usually, a consolidation phase denotes the placement of bids by investors who didn’t take positions in the initial rally or those investors initiate longs, which prefer to enter in an auction after a bullish bias sets in.

The 65-period Simple Moving Average (SMA) at 14.49 has acted as major support for the asset.

The Relative Strength Index (RSI) (14) has sensed support from 40.00 and is likely to oscillate in a range of 40.00-60.00. For a fresh rally, the RSI (14) needs to surpass 60.00.

If the pair manages to pass Tuesday’s high at 14.84, bulls may send the major quickly to the psychological level at 15.00. Breach of the latter will grind the greenback bulls higher towards 16 December 2021 high at 15.75.

On the contrary, bulls may lose their grip if the major slip below Tuesday’s low at 14.39. Should this occur, the pair will slip towards March 7 low at 14.19, followed by March 4 low at 14.08.

USD/TRY four-hour chart

Japan’s government is considering compiling a fresh economic package after the fiscal 2022 budget passes parliament, per Kyodo news agency.

The Russia-Ukraine war is likely to deliver "a major blow" to the global economy, although its impact on the Asian region is likely to be limited, the International Monetary Fund (IMF) said in a post uploaded on its website on Tuesday.

Key takeaways

“The conflict is a major blow to the global economy that will hurt growth and raise prices.”

“Expect to lower the Fund’s previous forecast for 4.4 percent global economic growth in 2022.”

In Asia and the Pacific, specifically, spillovers from Russia's invasion of Ukraine are "likely limited given the lack of close economic ties, but slower growth in Europe and the global economy will take a heavy toll on major exporters.”

“In Asia, the impact will be felt mostly by petroleum importers of the Association of Southeast Asian Nations, India and some Pacific Islands.”

“Countries with direct trade, tourism, and financial exposures would feel mounting pressure.”

“A greater risk of unrest in some regions, from Sub-Saharan Africa and Latin America to the Caucasus and Central Asia.”

“The war may fundamentally alter the global economic and geopolitical order should energy trade shift, supply chains reconfigure, payment networks fragment, and countries rethink reserve currency holdings.”

Market reaction

• Ukraine president says positions of Ukraine, Russia at talks sound more realistic
• USD/RUB Price Analysis: Ruble retreats from 20-DMA but bulls stay hopeful

• USD/RUB fades bounce off fortnight low, snaps four-day downtrend.
• MACD flashes record bearish signal on D1, 124.20-25 appears tough nut to crack for buyers.
• One-month-old ascending trend line adds to the downside filters.

USD/RUB bulls struggle to keep reins around 109.50, despite printing the first daily gains in five during Wednesday’s Asian session.

The Russian ruble (RUB) pair dropped to the lowest levels since March 04 the previous day before taking a U-turn from the 20-DMA.

The rebound, however, fails to gain support from the MACD as it prints the biggest bearish signal in the last few weeks.

Also challenging the USD/RUB buyers is a convergence of the 10-DMA and a one-week-old resistance line, around 124.20-25.

If at all the pair rises past 124.25, it can quickly rise to 140.00 before challenging the record top, also the monthly peak, surrounding 155.00.

On the contrary, a daily closing below 20-DMA level of 106.10 will direct the USD/RUB prices towards an ascending support line from mid-February, near 96.00 at the latest. It's worth noting that the 100.00 threshold will act as an intermediate halt during the fall.

In a case where USD/RUB breaks the aforementioned support line, the odds of witnessing a fresh monthly low, currently around 89.40, can’t be ruled out.

USD/RUB: Daily chart

Trend: Bearish

Speaking at the Chamber of Commerce and Industry WA on Wednesday, Australian Prime Minister Scott Morrison warned Australia will likely be affected by the negative global economic fallout from Russia's invasion of Ukraine.

Key quotes

“The world is facing the biggest energy shock since the 1970s.”

"That is likely to depress global growth and we know higher oil prices means greater pressure on family budgets at the petrol bowser.”

• AUD/USD picks up bids to refresh intraday high, extends the previous day’s rebound from fortnight low.
• Market sentiment remains sour amid mixed concerns over Ukraine-Russia peace talks and pre-Fed anxiety.
• Stocks in Hong Kong, China recover as daily virus infections ease in Beijing.
• Powell’s act of balancing rate-hike, US Retail Sales and risk catalysts are crucial for fresh impetus.

AUD/USD tracks recovery in most Asia-Pacific stocks while piercing the 0.7200 threshold to refresh intraday high during Wednesday’s Asian session. Even so, market’s anxiety ahead of the key Federal Open Market Committee (FOMC) and indecision over the Ukraine-Russia peace progress challenge the pair’s recovery moves.

In addition to the equities upbeat data at home also favor the AUD/USD prices. That said, Australia’s Westpac Leading Index improved to -0.15% from -0.3% prior.

Stocks in China and Hong Kong lead Asia-Pacific bulls as China reports an easing in the daily covid numbers. “China reports 1,952 new coronavirus cases on March 15 versus 3,602 a day earlier,” said Reuters.

Elsewhere, S&P 500 Futures drop 0.25% to 4,250 whereas the US 10-year Treasury yields snap seven-day uptrend around the highest levels since June 2019, down 1.5 basis points (bps) to 2.145% at the latest.

While portraying the bearish catalysts, the mixed signals over the Russia-Ukraine peace talks, false by their respective leaders could be cited as the major one. On the same line are the US data and the inflation expectations.

Although Ukrainian President Volodymyr Zelenskyy said on Wednesday that the positions of Ukraine and Russia at peace talks were sounding more realistic, per Reuters, Russian President Vladimir Putin said Kyiv is not serious about finding a mutually acceptable solution. Recent updates suggest that Ukraine is likely to request more weaponry helps from the US, which will be approved by US President Joe Biden, as signaled by the Wall Street Journal (WSJ). Hence, an absence of major progress in the talks and mixed comments keep troubling traders when they read the Russia-Ukraine crisis.

US Producer Price Index (PPI) matched YoY expectations of 10% growth whereas NY Empire State Manufacturing Index printed the biggest downside since May 2020. On the other hand, US inflation expectations from the record top, as signaled by the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, dropped from the second consecutive day after refreshing the record top.

Looking forward, US Retail Sales for February, expected to ease to 0.4% from 3.8% prior, will join risk catalysts to direct short-term AUD/USD moves but major attention will be given to the Fed’s verdict.

Read: Fed Interest Rate Decision Preview: Is history a guide?

Technical analysis

Although an ascending trend line from late January 2022, around 0.7185, restricts the immediate downside of the AUD/USD prices, a daily closing beyond the 100-DMA level of 0.7218 becomes necessary to convince the bulls.

• The downtrend in EUR/USD has stalled and the price is correcting. 
• EUR/USD bulls eye a break of 1.1050 for a restest of old weekly support. 

EUR/USD is meeting an area of weekly support and has started to decelerate in the 2022 sell-off with a low made near 1.08 the figure last week. The bulls have moved in and are correcting the bearish impulse. This leaves the 38.2% Fibonacci retracement level exposed which is near to the 1.1140s. The following illustrates the current market structure from a weekly perspective:

As illustrated, the price is moving in on the scale of Fibonaccis. with only 1.1050 in the way for a firm correction into the aforementioned area of liquidity near old support. 

Analysts at Bank of America Global Research (BofA) offer a sneak peek at what they expected from the March Federal Reserve (Fed) policy meeting due this Wednesday.

Key quotes

"We expect the Fed to kick off the rate hiking cycle with 25bp at the March FOMC.”

“In addition, the Fed is likely to release an addendum to their "Principles for Reducing the Size of the Federal Reserve's Balance Sheet", with specifics on caps for the unwinding of their holdings of Treasuries and agency securities (base case: $60bn cap UST, $40bn cap MBS, no cap bills).”

“This would provide a strong signal that the Fed is ready to commence Quantitative Tightening (QT) in May, which is our base case.”

"In the Summary of Economic Projections, we expect a pull forward in the median hiking cycle to reveal 5 hikes this year, 4 next year, and 1 in 2024. Growth and unemployment should be revised lower while headline and core PCE inflation get revised higher.” 

“In the press conference, we expect a hawkish message from Chair Powell, who will likely reiterate that the Fed needs to get serious about price stability, though we think he will flag risks to the outlook from the Russia/Ukraine conflict and higher commodity prices.”

• Gold needs a dovish Fed to regain traction

• Silver consolidates recent losses near two-week low, hovers around intraday high of late.
• Upbeat RSI, sustained U-turn from short-term key moving average favor buyers.
• Previous support line from early February tests recovery moves, 200-DMA appears tough nut to crack for sellers.

Silver (XAG/USD) prices keep the U-turn from 21-DMA while teasing $25.00 during Wednesday’s Asian session. In doing so, the bright metal recovers from a fortnight low, marked the previous day, to print the first positive day in four.

Given the quote’s successful bounce off the short-term DMA and the above-50 RSI line, XAG/USD may extend the latest rebound towards 50% Fibonacci retracement (Fibo.) of May-October 2021 downside, near $25.10.

However, the support-turned-resistance line from February 03, near $25.35 by the press time, will challenge the commodity bulls afterward.

Even if the silver buyers manage to cross the $25.35 hurdle, the 61.8% Fibo. will precede the monthly high, respectively around $25.95 and $26.95, to challenge the further upside.

Alternatively, a daily closing below the 21-DMA level of $24.90 will drag the XAG/USD prices to the 38.2% Fibonacci retracement level of $24.20.

Though, the 200-DMA, around $24.00 by the press time, will challenge the bullion’s additional declines.

Silver: Daily chart

Trend: Further recovery expected

Kazuo Momma, a former top official in charge of monetary policy at the BOJ said in a Bloomberg interview, should the yen depreciate further, it may prompt a shift in the central bank’s guidance, as it would be seen as negative for the Japanese economy.  

Key quotes

“The yen has already moved a lot compared with last year.”

“So, a further weakening means volatility has generally been high. That isn’t at all desirable.”

‘Absolutely no chance’ of normalization moves at moment.”

Market reaction

USD/JPY is struggling near-daily lows of 118.28 amid falling Treasury yields and anxiety ahead of the Fed decision. The spot is trading modestly flat on the day.

• The bears GBP/USD will look to take over on the daily chart and break below 1.30 the figure. 
• The weekly M-formation is noted, but the weekly demand area could be mitigated before a correction to the upside. 

GBP/USD is stalling in the sell-off as the price moves into what could be deemed as a solid longer-term demand area. However, there is room to go with 1.2850 in focus for the days and weeks ahead. In the meantime, there are prospects of a bullish correction as per the daily chart.

GBP/USD weekly chart

The M-formation is a compelling chart pattern on the weekly chart and the price, in due course, would be expected to revert back to the neckline near 1.3360. 1.3150 would be the first port of call, however.

Meanwhile, there are prospects of a downside continuation according to the daily chart and the depth of the weekly demand area. 

GBP/USD daily chart

The price would be expected to correct into the resistance zone and should this area hold, then the bears will take over and take this below 1.30 the figure. 

• S&P 500 Futures pare the biggest daily gain in a week, US Treasury yields ease from the highest levels since mid-2019s.
• Ukraine President Volodymyr Zelenskyy said, “talks were sounding more realistic,” but Russia’s Putin said Kyiv isn’t serious.
• China reports an easing in daily covid cases but figures stay near early pandemic levels.
• Fed is up for a 0.25% rate-hike, surprise lies in how Powell balances economic forecasts.

Global markets portray the typical pre-Fed nervousness with bond yields and stock futures both down during Wednesday’s Asian session. Adding to the traders’ woes are the mixed signals over the Ukraine-Russia tussles and China’s covid woes, despite the latest easing in daily virus infections.

While portraying the mood, S&P 500 Futures drop 0.25% to 4,250 whereas the US 10-year Treasury yields snap seven-day uptrend around the highest levels since June 2019, down 1.5 basis points (bps) to 2.145% at the latest.

Although Ukrainian President Volodymyr Zelenskyy said on Wednesday that the positions of Ukraine and Russia at peace talks were sounding more realistic, per Reuters, Russian President Vladimir Putin said Kyiv is not serious about finding a mutually acceptable solution. Recent updates suggest that Ukraine is likely to request more weaponry helps from the US, which will be approved by US President Joe Biden, as signaled by the Wall Street Journal (WSJ). Hence, an absence of major progress in the talks and mixed comments keep troubling traders when they read the Russia-Ukraine crisis.

Elsewhere, China reports 1,952 new coronavirus cases on March 15 versus 3,602 a day earlier, per Reuters. Even so, the daily virus numbers remain at the record top and challenge market sentiment.

On a different page, mixed US data and easing inflation expectations add challenges for the Fed policymakers during today’s Federal Open Market Committee (FOMC). That said, US Producer Price Index (PPI) matched YoY expectations of 10% growth whereas NY Empire State Manufacturing Index printed the biggest downside since May 2020. On the other hand, US inflation expectations from the record top, as signaled by the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, dropped from the second consecutive day after refreshing the record top.

To sum up, markets are likely to remain jittery but the traditional safe-havens may not benefit amid the pre-Fed caution. In addition to the Fed headlines and Chairman Jerome Powell’s speech, Ukraine-Russia updates, China COVID-19 news and the US Retail Sales for February, expected to ease to 0.4% from 3.8% prior, will also be important to watch for fresh impulse.

Read: Fed Interest Rate Decision Preview: Is history a guide?

• USD/CHF renews intraday low while extending pullback from 11-month high.
• Overbought RSI triggered consolidation but bulls remain hopeful above previous resistance line.
• Convergence of 200-DMA, 50% Fibonacci retracement appears tough nut to crack for bears.

USD/CHF takes offers to refresh intraday low around 0.9395, down 0.18% on a day heading into Wednesday’s European session.

In doing so, the Swiss currency (CHF) pair snaps a four-day winning streak that poked April 2021 levels the previous day.

However, the overbought RSI conditions triggered the quote’s pullback move towards the resistance-turned-support line from September 2021, near 0.9385 at the latest.

It’s worth noting that the USD/CHF weakness past 0.9385 will direct it to January’s high 0.9343 and then to the 61.8% Fibonacci retracement (Fibo.) of April-June 2021 fall, close to 0.9264.

Should the pair bears keep reins past 0.9264, a confluence of the 200-DMA and 50% Fibo. around the 0.9200 threshold will be a tough nut to crack for them.

Meanwhile, recovery moves need to cross the previous day’s high of 0.9431 to justify the bullish MACD signals, which in turn could propel USD/CHF prices towards the year 2021 peak of 0.9472.

Following that, the 0.9500 threshold and multiple tops marked during mid-June 2020 around 0.9530-35 will be in focus.

To sum up, USD/CHF remains on the bull’s radar despite the latest pullback moves.

USD/CHF: Daily chart

Trend: Pullback expected

In recent trade today, the People’s Bank of China (PBOC) set the yuan (CNY) at 6.3800 vs the estimated 6.3802 and the previous 6.3760. This was the weakest since Dec 2021.

About the fix

China maintains strict control of the yuan’s rate on the mainland.

The onshore yuan (CNY) differs from the offshore one (CNH) in trading restrictions, this last one is not as tightly controlled.

Each morning, the People’s Bank of China (PBOC) sets a so-called daily midpoint fix, based on the yuan’s previous day closing level and quotations taken from the inter-bank dealer.

Reuters reports that the Ukrainian President Volodymyr Zelenskiy said in a video address released early on Wednesday that the positions of Ukraine and Russia at peace talks were sounding more realistic but more time was needed.

''A senior Ukrainian official said on Tuesday that talks with Russia were very difficult but there was "certainly room for compromise," adding that negotiations would continue on Wednesday.''

''''The meetings continue, and, I am informed, the positions during the negotiations already sound more realistic. But time is still needed for the decisions to be in the interests of Ukraine," said Zelenskiy.''

Meanwhile, air raid sirens are sounding in at least 6 regions including Kyiv and Kharkiv. 

• USD/JPY looks to claim a five-year high at 118.66 ahead of the Fed’s monetary policy.
• A quarter of the percent rate hike is underpinned against a 50 bps.
• Apart from the Fed’s policy, BOJ’s interest rate decision is due on Friday.

The USD/JPY pair has opened near Tuesday’s closing price at 118.32 but is likely to continue its seven-day winning streak after violating Tuesday’s high at 118.45 amid rising uncertainty over the monetary policy announcement by the Federal Reserve (Fed) on Wednesday.

It is worth noting that the US inflation at 7.9, previously recorded in February is principally higher than the targeted inflation of up to 2%. In order to tame the galloping inflation, the Fed has to shoot up the interest rates. The street was expecting a 50 basis point (bps) rate hike to curtain the well-above targeted inflation. However, the Ukraine crisis after its invasion by Russia has made it difficult for the central banks to shoot up their benchmark rates, considering the intensifying fears of stagflation.

A ceasefire between the Kremlin and Kyiv is far from over although the effects of the headlines are timed now as investors have digested the worst-case scenarios. Therefore, much likely the Fed will choose a 25 bps rate hike and a ‘wait and watch approach for the monetary policies later this year.

The market participants will keenly focus on the stance of the Fed for upcoming Fed Open Market Committee (FOMC) meets. Apart from that, the US Retail Sales on Wednesday also holds significant importance. On Japan’s docket, the Bank of Japan (BOJ) will announce its monetary policy on Friday. The BOJ is likely to keep the status unchanged.

• GBP/USD extends U-turn from multi-day bottom amid sluggish markets, USD retreat.
• UK announced additional sanctions on Russia, Moscow-Kyiv talks continue.
• Upbeat UK jobs report underpins hopes of BOE’s successive rate hikes but the inflation woes may test the cable bulls.
• Fed is up for a 0.25% rate hike, major attention is on the economic projections, Chairman Powell’s speech.

GBP/USD treads water around 1.3040-50 amid anxious market conditions during Wednesday’s Asian session.

The cable pair snapped a three-day downtrend to bounce off the lowest levels since November 2021 following the upbeat UK jobs report. Also on the positive side was the US dollar’s retreat amid pre-Fed caution.

That said, the UK Claimant Count Change dropped to -48.1K for February, versus -31.9K prior, whereas the ILO Unemployment Rate declined below 4.0% market forecasts and 4.1% previous readouts to 3.9% for three months ended in January.

Read: UK Unemployment Rate drops to 3.9% in January vs. 4.0% expected

The US Dollar Index (DXY) declined for the first time in four days on Tuesday, down 0.05% around 98.90 by the press time, as the US Treasury yields fail to stay firmer around a multi-day high. That said, the US 10-year Treasury yields ended Tuesday unchanged despite rising to mid-2019 levels during the initial day, down two basis points (bps) to 2.142% at the latest. On the same line, the five-year bond coupon also eases from the highest levels since May 2019 marked the previous day. Further, S&P 500 Futures print mild losses despite the positive performance of Wall Street.

It’s worth noting that the recent cautious optimism surrounding the Ukraine-Russia peace talks and hopes of faster monetary policy tightening by the Bank of England (BOE) favor the GBP/USD bulls. However, fresh covid fears from China and the wider bullish expectations from the Fed challenge the pair buyers.

Looking forward, Ukraine-Russia updates, China COVID-19 news and the US Retail Sales for February, expected to ease to 0.4% from 3.8% prior, will direct the GBP/USD moves ahead of the Federal Open Market Committee (FOMC).

Read: Fed Interest Rate Decision Preview: Is history a guide?

Technical analysis

Unless crossing December’s low of 1.3160, GBP/USD remains vulnerable to visit a downward sloping support line from April 2021, around 1.2950 by the press time.

• GBP/JPY prints four-day uptrend, stays mildly bid around two-week high.
• MACD prints most bullish signals in five weeks, sustained trading above 200-DMA also favor buyers.
• Descending trend line from early February, 50-DMA challenges upside moves.

GBP/JPY remains on the front foot around 154.40, up 0.08% during the four-day winning streak to Wednesday’s Asian session.

In doing so, the yen cross justifies the early-week breakout of the 200-DMA, as well as the bullish MACD signals, to stay firmer around a fortnight high.

However, a downward sloping trend line from February 10 and the 50-DMA, respectively near 154.70 and 155.10, test the GBP/JPY bulls.

Also acting as an upside filter is the monthly high near 155.25.

Meanwhile, pullback moves remain elusive beyond the 200-DMA level of 153.33.

Following that, the 61.8% Fibonacci retracement (Fibo) of December-February upside and the monthly low, close to 152.45 and 151.00 in that order, appear as tough nuts to crack for GBP/JPY bears.

Overall, GBP/JPY is ready for further upside but a bumpy road to the north may test the bulls.

GBP/JPY: Daily chart

Trend: Further upside expected

• DXY remains sidelined after snapping three-day uptrend the previous day.
• Yields retreat from multi-day top amid mixed headlines from Ukraine-Russia, covid fears from China.
• Mixed US data, pullback in inflation expectations adds interest to today’s FOMC.
• While a 0.25% rate-hike is given, economic projections and Powell’s speech will be the key.

US Dollar Index (DXY) tracks a pullback in Treasury yields to extend the previous day’s downbeat performance to 98.90, down 0.08% intraday on the Fed day.

Mixed concerns surrounding the Kyiv-Moscow talks joined not to impressive US data, as well as market’s fear ahead of today’s Federal Open Market Committee (FOMC) to weigh on the greenback gauge on Tuesday. It’s worth noting that China’s covid woes added to the risk-off catalysts and restricted the DXY losses.

Starting with the Ukraine-Russia crisis, Ukraine President Volodymyr Zelenskyy’s adviser triggered hopes of peace between Moscow and Kyiv, which in turn improved market sentiment during early Tuesday. However, Russian President Vladimir Putin said Kyiv is not serious about finding a mutually acceptable solution and poured cold water on the face of optimists.

Following that, Mykhailo Podoliyak, one of the representatives of Ukraine at Russian-Ukrainian negotiations cites room for compromise. It’s worth noting that the UK added more sanctions on Russia whereas Japan is up for removing Moscow from favored trade status. In return, Moscow banned Canadian PM from entering their country and levied sanctions on US President Joe Biden. Recently, Reuters quoted Interfax Ukraine News while saying, “Ukrainian President Volodymyr Zelenskyy said on Wednesday that the positions of Ukraine and Russia at peace talks were sounding more realistic.”

Elsewhere, the US Producer Price Index (PPI) matched YoY expectations of 10% growth whereas NY Empire State Manufacturing Index printed the biggest downside since May 2020.

It’s worth noting that China’s record covid numbers and lockdowns in multiple cities renew early pandemic woes but couldn’t weigh on Wall Street as T-bond yields failed to stay firmer around the multi-day top.

That said, the US 10-year Treasury yields ended Tuesday unchanged despite rising to mid-2019 levels during the initial day, down one basis point (bp) to 2.149% at the latest. On the same line, the five-year bond coupon also eases from the highest levels since May 2019 marked the previous day. Further, S&P 500 Futures print mild losses despite the positive performance of Wall Street.

Moving on, DXY traders will pay attention to the Fed’s verdict even if the 0.25% rate-hike is almost given. The reason could be linked to the doubts over future economic growth and inflation scenarios due to the latest geopolitical fears. As a result, Fed Chairman Jerome Powell has a tough task on hand to please bulls.

Read: Fed Interest Rate Decision Preview: Is history a guide?

Ahead of the Fed, Ukraine-Russia updates, China COVID-19 news and the US Retail Sales for February, expected to ease to 0.4% from 3.8% prior, will direct the US Dollar Index (DXY) moves.

Read: US Retail Sales Preview: Relentless shopper may provide dollar-selling opportunity ahead of the Fed

Technical analysis

Even if a one-week-old resistance line challenges US Dollar Index bulls around 99.25, the 10-DMA defends DXY optimists around 98.70. Even if the quote drops below 10-DMA, an upward sloping trend line from February 21, near 98.35, adds to the downside filters. Additionally, bullish MACD signals and firmer RSI also suggest further upside for the greenback gauge.

• WTI is likely to see more pain on oil supply fix, lockdown in Shenzhen, and tightening Fed’s policy.
• Western leaders have chosen to reduce dependency on Russian oil imports gradually.
• The DXY steadies around 99.00 ahead of the monetary policy announcement by the Fed.

West Texas Intermediate (WTI), futures on NYMEX, is oscillating around $95.00 but is likely to bear more pain amid a promise of higher oil supply by the OPEC cartel and rising Covid-19 cases in China.

The promise of pumping more oil from the OPEC cartel in response to the urge from US President Joe Biden to fix the deviation in the demand-supply mechanism has brought a sell-off in the oil prices. The urge from the latter came after the US imposed sanctions on Russia. Moscow’s invasion of Ukraine forced the US to restrict the oil supply from Russia while the other Western leaders chose to reduce dependency on the Russian oil imports gradually.  This has corrected the oil prices significantly after a swift move towards March 8 high at $126.51.

Meanwhile, the rising cases of Covid-19 in China have forced the Chinese administration to restrict the movement of men, materials, and machines. A lockdown has been announced in Shenzhen city to contain the epidemic of Covid-19. The restriction may pressure the imports of oil in China. It is worth noting that China is one of the largest oil importers of the world and a cut on its oil imports is more likely to drag the oil prices lower.

On the dollar front, the US dollar index (DXY) is slipped marginally below 99.00 amid rising obscurity over the interest rate decision by the Federal Reserve (Fed). An interest rate hike by the Fed will squeeze liquidity injection into the economy, which may reduce manufacturing activities and eventually the consumption of oil.  Therefore, a confluence of multiple macro factors is hoping for further weakness in the oil prices.