It is a huge week that is jam packed with tier one economic data to drive market moves. The US dollar continues on its remarkable bounce back whilst the story of the rise and fall of sterling also continues down a slippery slope. We consider the outlook of forex, equities and commodities markets.
A month into the Q2, the outlook for major forex has completely flipped. During the first few months of the year, the dollar outlook still looked precarious. Hawkish signals were coming out from other G4 central banks which were all either just starting on the road to tightening, or at least preparing for it. However, gradually global growth indicators have tailed off and expectations of tightening have receded. With soft data deteriorating, and subdued inflation the but Draghi is playing it very coy. Although the ECB may still give forward guidance on the exit from its Asset Purchase Program in June the euro is suffering. BoE Governor Carney, the “unreliable boyfriend” has almost completely retrenched given weak data, whilst Friday’s terrible GDP number could push a hike back until November at the earliest. In Japan, having as recently as January projected that it would hit its inflation goal by fiscal year 2019, the BoJ has now removed the timeframe suggesting that inflation (all important for the BoJ) would take longer to hit target. For the Fed, inflation expectations have remained strong, and it is now a serious question of four hikes this year. Geopolitical concerns have taken a back seat recently, allowing renewed focus on yield differentials. Inflation is again crucial this week, with the core PCE expected to tick higher to +1.9%, and it will be interesting to see how the Q1 Employment Cost Index rising to 0.8% plays into wage growth. All signs are that the dollar is now on a medium term push higher and if the 10 year yield breaks decisively to multi-year highs, it could continue.
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