Key points to watch out for:
- Dollar Rebounds After Fed Meeting
- Yen falls despite rate hike, hits three-decade lows
- The end of the quarter may cause fluctuations in a quiet week
US Dollar Rebounds After Fed Meeting
Last week was filled with events on the economic calendar, especially for those trading in the foreign exchange market. There were nearly five central bank meetings that caused volatility in market prices. In an unexpected move, the Federal Reserve (Fed) continued to assert that it will cut interest rates three times this year, despite its new economic forecasts that indicate inflation remains slightly high.
The main message was that the Fed will likely begin cutting interest rates in early summer, despite recent signs that inflation could be more persistent. In other words, the Fed seems to be willing to let inflation run for a while longer, in order to minimize the risks of a possible recession.
Last week, investors reacted by selling all their dollar positions, although the currency managed to recover from these losses and closed the week in positive territory as other strong market currencies also fell due to data released by the different central banks. For example, the euro was shaken by disappointing business surveys, while the pound fell after the Bank of England left open the possibility of an interest rate cut in the summer.
This week, the agenda will be driven by durable goods orders and US consumer confidence on Tuesday, March 26, when the core PCE price index is released. Estimates indicate that the core PCE index remained unchanged at 2.8% in February, confirming that the progress towards inflation appears to have stalled.
Beyond the data and market sentiment, the movement of other major currencies and the evolution of global risk sentiment will also be vital for the dollar to position itself as a safe haven against any volatility-generating event. That said, a rebound in the dollar could require a stock market sell-off that fuels demand for safe-haven assets, as well as more signals from other economies.
It is important to keep in mind that next Friday, March 29, is a holiday in major economies and therefore both stock and fixed income markets will be closed. The foreign exchange market will continue to operate, albeit with possibly lower liquidity, especially as the end of the quarter approaches. In such an environment, unexpected movements in the foreign exchange market can occur without the need for news support.
Yen Loses Ground Despite BOJ Hike
In Japan, the yen hit a 30-year low last week, even after the Bank of Japan raised interest rates, ending a period of negative interest rates.
The market seems to feel that expectations were not met because the Bank of Japan did not provide clear signals about the rate hike. Investors are likely concerned that this was a one-off measure, especially as other central banks prepare to cut interest rates.
The minutes of that meeting will be released on Thursday, March 28, and will provide more context around the decision to raise rates. On Friday, March 29, the latest CPI data will be released, shedding light on the future of inflation in the country.
Canadian Growth and Australian Inflation
In Canada, monthly GDP figures for January will be released on Thursday, March 28. With the quarter about to end, this release is a bit delayed, but could still grab market attention. That said, the performance of oil prices could have a bigger impact on the Canadian dollar, as Canada is an oil exporter.
In Australia, inflation data for February will be released on Wednesday, March 27, and will provide signals about the possible timing of an interest rate cut by the Reserve Bank of Australia. For now, markets are expecting this to happen in September.
