Market nervousness rises ahead of PCE inflation and Powell testimony
The Fed’s favourite measure of inflation for the month of January, the core personal consumption measure or Core PCE, is due for release this afternoon. The tension is mounting among investors as this indicator is closely monitored by the Fed and could therefore influence significantly the path of monetary policy in the US. Indeed, the publication of January’s CPI sparked strong reactions across financial markets as market participants adjusted their positions for a stepper path of interest rate. The headline PCE is expected to have remained stable at 1.7%y/y in January, while the core measure should come in at 1.5%y/y.
The second key event of the day is the testimony of Fed chair Powell before the Senate banking committee. We believe that Powell will be keen to soften its hawkish stance regarding the US economy. During a congressional testimony, Powell suggested that the Fed could increase borrowing rates four times this year, compared to three hikes expected by market participants and signalled by the central bank so far.
So what can investors should expect from this day? On the one hand, an upside surprise in inflation could definitely trigger a dollar; however, as discussed yesterday, higher interest rates could slowly dampen US growth against the backdrop of a leveraged private sector and an already stretched federal budget. On the other hand, Powell may use a more dovish tone today during his Senate hearing. Therefore, we believe that all-in-all the risk is skewed to the downside for the US dollar.
EUR/USD is currently trading around the bottom of its monthly range. A break of the strong 1.2165 support will open the door towards 1.20, then 1.1916 (low from January 9th). On the upside, a first resistance can be found at around 1.2350 (previous highs), then 1.2555 (high February 16th).
Indian growth wonders
Indian quarter (October – December) Gross Domestic Product published on Wednesday provided Prime Minister Narendra Modi with a big relief, given at 7.20% (consensus at 6.90%) against July-September and April – June quarters at 6.30% and 5.70%, making it the largest quarterly growth of the year. India becomes the fastest growing economy in relative numbers (India and China GDP 2017: 7.10% and 6.80%), as China starts seeing signs of slowdown in consumption and manufacture (January CPI at slowest pace since July 2017, PPI lowest rate since November 2016 and Manufacturing PMI low since July 2016).
Indian Sensex declines though the release, valued at 34’153 (-0.56%) along world equity indexes decline.
