Inflation and central banks in focus once again
BY Janne Muta, M.Sc in Finance|March 31, 2023
The Eurozone March flash CPI estimate just came in at +6.9% y/y (+7.1% expected). Lower-than-expected headline inflation didn’t create much of a reaction in EURUSD as core inflation came in a notch higher than the month before (5.7% vs. 5.6% prior). Yesterday’s hot inflation numbers from Germany fueled expectations that the ECB must hike another 50 bp. These expectations pushed the dollar index lower yesterday helping gold to rally (EUR has the heaviest weight in the index).
According to EPFR data, investors have recently injected approximately $1.26 billion into gold mutual and exchange-traded funds. This is the largest weekly net inflow since April 2022. The worry has been the increased systemic risk in banks. If the stock markets are correct then the biggest worries are behind now and therefore the bids in gold might also start softening soon.
The dollar is also a safe-haven currency during times of great market turmoil but now that a widespread banking crisis is avoided the dollar isn’t that attractive either anymore. But, when’s the Fed ready to hike again? It recently said it might pause its rate hike cycle due to turmoil in the banking sector. What about now that things are looking better again? Perhaps today’s PCE release will give us more clues on what is happening with inflation and what the Fed might do.
In recent Fedtalk the bankers have been more hawkish than dovish. Boston Fed President Susan Collins has stated that it was appropriate to raise interest rates by another 25 bps in March. She added that and more work is needed to bring inflation down to the 2% target. Minneapolis Fed President Neel Kashkari has also noted that the central bank has more work to do to achieve its 2% inflation goal. Richmond Fed President Thomas Barkin has cautioned that backing off on inflation too soon could lead to a stronger comeback, necessitating even more action and causing more damage.
EURUSD is reacting lower from a high (1.0929) put in place on March 23. If the market now sells off from these levels it creates a double top in the 4h chart. This would imply the support at 1.0823 would be in jeopardy. Below the 1.0823 level, the market could trade to 1.0750. If the 1.0929 is taken out the market probably trades to 1.1150 or so.
Gold is bullish above 1955. The bulls must be happy now. They got another day with upside momentum yesterday. USD weakness helped the bulls but the recent price action hinted that we might see higher prices. I said yesterday a move to 1988 was likely and at the time of writing this the market is about 4 dollars short of that level. The market could trade higher than 1988, but it is a likely target given the recent price action. Above 1984 the market a move to the 1998 - 2000 range wouldn’t be a surprise. A break below 1955 would probably take the market to 1944.
Dax is bullish above 15 465. The market has been strong but is approaching the March highs (15 708) so the bulls need to be a little cautious. Should the market find the energy to push decisively above this level a move to the 16 000 - 16 100 region would be likely. And, if the 15 465 support level breaks a move to 15 3800 could be in the cards and then possibly to 15 270 on extension.
DJ is trading at resistance (32 930) but remains bullish above 32 683. Below the level, we might see it moving to 32 550. If the supply at 32 930 is not enough to hold the market down it probably trades to 33 250.
The Next Main Risk Events
- CAD GDP m/m
- USD Core PCE Price Index m/m
- USD Chicago PMI
- USD Revised UoM Consumer Sentiment
For more information and details see the TIOmarkets economic calendar.
Chief Market Analyst
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Janne Muta holds an M.Sc in finance and has over 20 years experience in analysing and trading the financial markets.
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