Market Outlook for the week of March 20-24

Last week, US CPI data beat expectations, with headline inflation rising 0.4% and core CPI 0.5%. The ECB raised interest rates by 50 basis points, stressing that inflation is likely to remain too high and refrained from signaling any future policy changes.

They also noted the high levels of uncertainty in financial markets and said he would take a data-driven approach.

For this week, Tuesday, we will have the CPI print for Canada and the US on existing home sales. ECB President Lagarde will speak on a panel titled “CBDCs: Keeping momentum in uncertain times” at the Bank of International Settlement Innovation Summit in Basel.

This type of event should not create volatility in the markets, but it is worth keeping an eye on in case it comments on the bank stress situation or future rate hikes.

Wednesday will bring UK CPI data and what is probably the most anticipated event of the week: the FOMC policy announcement and the Fed Funds rate.

This will be followed by the SNB’s monetary policy assessment, key rate and press conference on Thursday, as well as the official MPC votes on UK bank rates, the monetary policy summary and the official bank rate. In the United States, unemployment claims and new home sales data will also be released.

On Friday we will have flash manufacturing and flash services PMIs for the Eurozone, UK and US

The CPI data for the Canadian economy is eagerly awaited as it will be the last printout before the next BoC meeting in April. The economy is holding up reasonably well, but the tight labor market, high levels of inflation and strong wage growth could force the bank to resume its tightening cycle. As a reminder, at the last meeting, the BoC decided to maintain rates. The consensus for the CPI y/y is to rise from 5.9% to 6.1% and the CPI m/m to also increase by 0.7%. The minutes of the BoC meeting will be released the next day and may contain clues to possible future rate hikes.

UK CPI is expected to show signs of slowing with m/m consensus at -0.4%. A downside surprise will likely suggest that the BoE’s bullish cycle is coming to an end.

Wednesday’s FOMC decision and Chairman Powell’s press conference will be the highlight of the week. The market consensus is for a 25 basis point hike, but swaps indicate that only 16 basis points of tightening is currently priced in, according to Scotiabank.

It will be interesting to see the Fed’s reaction to the current strains in the banking sector combined with high levels of inflation. A few analysts argue that it would be appropriate for the Fed to hold or even cut rates.

However, rate cuts right now could be a reckless move, especially with high inflation still looming. In conclusion, a 25 basis point hike seems to be the base case as assessing the impact of current events in the banking sector requires more time.

At the SNB meeting, analysts are expecting a rate hike of 50 or even 75 basis points. In Switzerland, inflation remains high, but even if it is not as high as in other developed countries, the latest rise in the national CPI is worrying.

The SNB estimated inflation for the first quarter at 3.0%, but it is currently above its estimate at 3.4%. That would warrant a 75 bps hike, but due to the turmoil at Credit Suisse, the bank might opt ​​for a more moderate 50 bps hike and see how the situation develops. As a reminder, the SNB also raised the rate by 50 basis points in December to 1%.

At this week’s BoE meeting, the consensus is for a 25 basis point rate hike which is supposed to be the last. It will be interesting to watch what the governor has to say about the situation in the banking sector and the risk of contagion following the problems at Credit Suisse.

At the ECB’s last meeting, President Lagarde hiked 50 basis points, fearing that a pullback from his pace of tightening could strike fear among investors, so the BoE could follow suit. reasoning.

The flash manufacturing and services PMIs for the Eurozone have shown signs of improvement since the beginning of the year. Lower energy prices have given some relief to consumer purchasing power, adding some optimism about the economy.

The consensus for the services PMI is 52.5, which is slightly lower than February’s print of 52.7, but still in expansion territory. The manufacturing PMI, however, while recovering, remains contracting overall, with 48.5 in February and an expected moderate rise to 48.9 in March.

Everyone is looking for clues as to how the banking sector’s woes might impact businesses, but right now it’s too early to see it in the data.

For the UK PMI flash, analysts will be watching whether February’s surprising rise, which put the index in expansion territory at 53.1 for the first time since July 2022, will continue, which could point to another side of the resumption of activity.

Although still in decline, the situation in the US real estate market has begun to stabilize since the beginning of the year after a period of pressure due to high mortgage rates. The consensus is for existing home sales to rise in February, but new home sales are expected to decline after January’s 7.2% jump.

USD/CAD expectations

The pair ended the week with no clear direction and may continue to move in a range. The FOMC meeting could cause some volatility, as well as CPI data in Canada if it surprises on the upside.

Overall, USD/CAD has room for further appreciation. A hawkish tone from the Fed coupled with the new Dot Plot could fuel an appreciation trend as investors appear to be indifferent to the CAD.

A correction is expected to the support level of 1.3685 and if this level holds, the next target could be the resistance level of 1.3855.

On the downside, the next support level is at 1.3585.