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Fed Governor Christopher Waller said that "a barrage of data" in February has challenged high view that FOMC was "making progress in moderating economic activity and reducing inflation."

"It could be that progress has stalled, or it is possible that the numbers released last month were a blip," he said.

"If job creation drops back down to a level consistent with the downward trajectory seen late last year and CPI inflation pulls back significantly from the January numbers and resumes its downward path, then I would endorse raising the target range for the federal funds rate a couple more times, to a projected terminal rate between 5.1 and 5.4 percent," he said.

"On the other hand, if those data reports continue to come in too hot, the policy target range will have to be raised this year even more to ensure that we do not lose the momentum that was in place before the data for January were released," he added.

Atlanta Fed President Raphael Bostic said yesterday, "there is the case that could be made that we need to go higher" on interest rate.

"Consumer spending is strong and labor markets remain quite tight and that those suggest that the economy's strength could be a bit more than people think, which means we might need to do more."

"I'm going to stay open to any possibility that if data come in stronger than expected then I will adjust my policy trajectory," Bostic said.

Boston Fed President Susan Collins said yesterday, "we will need to do some additional rate increases and exactly what the right amount is really needs to be dependent on a holistic review of the information that we receive."

"It will be important to hold there for some time because it takes a while for the effects of tighter financial conditions to work through the economy," she added.

"We've seen some early signs that wage and price pressures might be slowing," she said. "But we've also seen some evidence that high inflation" remains, particularly in some areas of services.

Key Highlights

• USD/JPY extended its increase above the 136.50 resistance.
• A major bullish trend line is forming with support near 136.20 on the 4-hours chart.
• Gold price might revisit the $1,845 and $1,850 resistance levels.
• The US ISM Services PMI could decline from 55.2 to 54.5 in Feb 2023.

USD/JPY Technical Analysis

The US Dollar started a steady increase above the 135.00 resistance against the Japanese Yen. USD/JPY even climbed above 136.20 to move further into a positive zone.

Looking at the 4-hours chart, the pair settled above the 136.00 support level, the 100 simple moving average (red, 4-hours), and the 200 simple moving average (green, 4-hours).

Finally, there was a spike above the 137.00 level. The pair is clearly trading in a strong uptrend. There is also a major bullish trend line forming with support near 136.20 on the same chart. On the upside, an immediate resistance is near the 137.20 level.

The next major resistance is near the 138.00 level. A clear move above the 138.00 resistance might start a steady increase towards the 140.00 zone.

On the downside, an immediate support is near the 136.20 level. The next major support is near the 135.50 level, below which there is a risk of a move towards the 134.20 level or the 100 simple moving average (red, 4-hours). Any more losses could open the doors for a drop towards 132.50.

Looking at gold price, there are some positive signs and the bulls might attempt a move towards the $1,845 resistance zone.

Economic Releases

• Germany’s Services PMI for Feb 2023 - Forecast 51.3, versus 51.3 previous.
• Euro Zone Services PMI for Feb 2023 – Forecast 53.0, versus 53.0 previous.
• UK Services PMI for Feb 2023 – Forecast 53.3, versus 53.3 previous.
• US Services PMI for Feb 2023 – Forecast 50.5, versus 50.5 previous.
• US ISM Services PMI for Feb 2023 – Forecast 54.5, versus 55.2 previous.

Key insights from the week that was.

This week, Australia’s Q4 GDP report and monthly consumer/housing releases provided a broad update on the health of Australia’s economy and its outlook. Offshore, the diverging prospects of the US and China were on display.

Q4 GDP for Australia came in well below the market’s expectation at 0.5%, 2.7%yr. In the event, the main surprise was an abrupt slowdown in household spending growth, which fell from 1.0% in Q3 to just 0.3% in Q4. Despite support for consumption from a 2.1% lift in nominal wages and a decline in the savings rate from 7.1% to 4.5% – freeing up roughly $9bn in spending capacity – intense cost of living pressures and rapidly rising interest rates saw a 2.2% decline in real disposable incomes, leading households to restrict their spending particularly on services.

With the tailwinds from earlier policy stimulus and reopening dynamics having now faded, the report suggests consumption growth will remain under pressure this year as the full effect of higher interest costs and inflation’s hit to real incomes continues to materialise (see below). Conditions for investment were lacklustre, the fall in construction work and decline in equipment spending leading a -0.8% decline in new business investment. Though, with capacity tight and tax incentives supportive, businesses remain constructive on the outlook for investment over the coming year.

More positively, Australia’s current account surplus widened from $0.8bn in Q3 (revised up from a deficit of $2.3bn) to $14.1bn in Q4, thereby marking 15 consecutive quarters of surplus, the longest run in the history of the series which dates back to 1959. As evinced by the 1.1ppt contribution from net exports to GDP growth, Australia’s trade position proved to be a key support for the economy into year-end. Indeed, the trade surplus widened to $41bn in the quarter as services exports bounced 9.8% thanks to the recovery in tourism and foreign student arrivals, while total import volumes posted a broad-based decline of 4.3%.

Another batch of volatile housing data meanwhile broadly reaffirmed our view on the outlook. Of note, dwelling approvals posted a much larger-than-expected decline of -27.6% in January, partly representing an unwinding of the high-rise unit spike of December, though the sharp 13.8% decline in private sector house approvals suggests the broader weakening remains well entrenched. However, the CoreLogic home value index fell by only 0.1% in February – a seemingly stable result corroborated by a slowing in price declines across all major capital cities. It should be noted that early-year housing data is prone to low-season measurement issues, distorting the finer interpretation of these results and warranting confirmation over the next few months of data.

As noted above, the Australian consumer will be at the epicentre of the slowdown in growth over 2023. This is supported not only by the clear softening in consumer spending in the national accounts, but also the accumulating evidence of underlying weakness within the retail sector, growth in sales having effectively stalled on a three month basis. Although the retail sector only accounts for around a third of total consumer spending, it is clear that broader inflation pressures remain at an uncomfortable level (despite month-to-month volatility) and are eroding household’s real spending capacity, the full effect of which will likely be a stalling in household consumption during second half of this year.

Moving offshore, the most significant US release this week was the ISM manufacturing survey for February. Overall, it pointed to continued contraction in the manufacturing sector and a belief that this trend will persist – the new orders series printing at 47.0 versus production’s 47.3. Relative to the headline and activity outcomes, employment remains resilient, the index indicating only a marginal reduction in labour use. The prices paid (for inputs) series received the most attention from the market, as it rebounded from 44.5 to 51.3 in the month. Some context is needed here, however. In the two years to June 2022, the height of the pandemic inflationary wave, this index averaged 78. Indeed, in the five years before the pandemic (to end-2019), the average was still 56. While inflation risks have to be monitored wherever they appear, we also have to be realistic on the significance of the signal. With respect to businesses, it is also worth mentioning that, taken together, the durable goods data and regional business surveys point to continued weakness in business investment.

This week’s housing data was also consistent with a sector that is stagnant to down. Residential construction fell a further 0.6% in January after a run of large negatives through late-2022. While the S&P CoreLogic CS 20-city house price measure fell another 0.5% in December. That said, when interest rates and supply allow, there is still demand for housing, pending home sales snapping 8.1% higher in January while mortgage rates were at their recent lows. Note though that pending homes sales are still 22% lower than a year ago and also that the 30-year mortgage rate is back near its cycle highs.

Turning to China, the official PMIs from the NBS confirmed this week that the economy has responded well to the end of COVID-zero, the manufacturing PMI rising to 52.6 and the services index to 56.3. For both sectors, output, new orders and employment all rose strongly. Service producers also reported an expansion of their profitability, with input costs inflation slowing as selling prices rose. Notable too was that the Caixin manufacturing PMI gained a similar amount as the NBS PMI. This points to smaller manufacturers also experiencing the benefit of the rebound.

Taking a longer-term perspective, this week we also investigated the outlook for Chinese industry associated with the global green transition. While the US has sought to curb China’s capacity and influence through the Inflation Reduction Act and their semiconductor regulation, the evidence suggests China’s dominance in many green industries is unlikely to be challenged. Simply, the Chinese product that the US decides to forgo can instead be marketed to Asia and other developed/developing nations across the world. The sale price may be lower in such a situation, but China’s efficiency and scale of production will make up for it. China’s own demand for green energy and transport will also remain strong for decades to come.

The negative consequences of the US’ actions are therefore likely to fall on their own economy, with limited supply and higher prices for related goods likely, particularly in the continued absence of rapid, large-scale investment in new capacity. The fringe risk for the global economy and environment is if the US encourages other developed markets to take a similar position against China. But, as for the US, the outcome of such a decision would likely be a slower path of emissions reduction at a higher cost; meanwhile China will continue to lead and profit from developing markets’ long path towards net zero. Ironically, China may even find its political and economic position strengthens as a result of the US’ hard line.

So far, the year 2023 has been eventful across several financial markets. As we step into March, it's time to prepare for the benefits the markets have in store. In this article, I will look into a few interesting, promising setups.

GBPAUD

The Daily timeframe of GBPAUD presents an entry from the rally-base-drop supply zone at the highlighted area. This entry naturally coincides with the 88% of the Fibonacci retracement tool and therefore grants an added confluence to our bearish sentiment.

Analysts’ Expectations:

• Direction: Bearish
• Target: 1.76525
• Invalidation: 1.90100

EURAUD

EURAUD is another lovely setup on the weekly timeframe. Here we see price trading within a supply zone, a resistance trendline, and the 200-period moving average serve as the additional confluences that help solidify the bearish sentiment. Not to forget, the supply zone also matches 88% of the Fibonacci retracement tool.

Analysts’ Expectations:

• Direction: Bearish
• Target: 1.51700
• Invalidation: 1.62000

CHFJPY

From a weekly point-of-view, the bearish sentiment is solid and clear. The price chart shows the price action reacting to the supply zone created by the previous market structure break. As a result of the trendline resistance and the 88% Fibonacci retracement level, it is safe to consider this another beautiful trading opportunity.

Analysts’ Expectations:

• Direction: Bearish
• Target: 142.6
• Invalidation: 148

USDCAD

USDCAD is the final setup to consider in this piece. The 50-Day moving average has recently crossed below the 100-Day moving average, suggesting the possibility of lower prices. There is also a confluence of the trendline resistance and the supply zone, solidifying the bearish sentiment alongside the 88% Fibonacci retracement level.

Analysts’ Expectations:

• Direction: Bearish
• Target: 1.33855
• Invalidation: 1.36600

CONCLUSION

The trading of CFDs comes at a risk. Thus, to succeed, you have to manage risks properly. To avoid costly mistakes while you look to trade these opportunities, be sure to do your due diligence and manage your risk appropriately.

• GBPJPY reversed from resistance level 164.55
• Likely to fall to support level 162.00

GBPJPY currency pair recently reversed down from the key resistance level 164.55 (former support from December) standing close to the 61.8% Fibonacci correction of the downward correction from October.

The downward reversal from the resistance level 164.55 created the daily Japanese candlesticks reversal pattern Shooting Star.

GBPJPY currency pair can be expected to fall further toward the next support level 162.00 (which stopped the previous correction (iv)).

In a speech, BoE Chief Economist Huw Pill said that "current momentum in economic activity may be slightly stronger than anticipated."

"CPI inflation is projected to fall to below the 2% target by the end of the forecast horizon", he said. But "there are considerable uncertainties around this outlook."

"Upside risks arise in large part from the possibility that domestic inflationary pressures prove more persistent than anticipated, owing to so-called 'second round effects' in price, cost and wage setting behaviour," he explained.

"The latest data for private sector regular pay growth – which was published after the MPC's forecast was finalised – surprised slightly to the upside."

Nevertheless, "some high-frequency indicators of wages have fallen quite sharply recently".

"The MPC will continue to monitor indications of persistence in domestic inflationary pressures closely, with a focus on developments in the labour market, in wage dynamics, in services price inflation and in measures of underlying inflation and inflation expectations."

Speaking notes and slides

Underlying inflation pressures have yet to improve for the ECB to signal an end to its policy rate hikes. Since the February meeting, the economic outlook and labour market still show resilience, pushing the eventual end of ECB hiking further out.

Accordingly we adjust our expectations for the policy path from ECB and now expect a policy peak rate of 4% (deposit rate), with hikes of 50bp in March, 50bp in May, 25bp in June and 25bp in July. We naturally remain data dependent and may adjust the call at a later stage, but for now we see the risks around our baseline rate hike expectations as broadly balanced. Our revision comes on the back of more resilient economic activity and more 'sticky' underlying inflation developments.

We see the 50bp rate hike ECB intends to deliver at the March meeting as a 'done deal', but the key discussions at the meeting will be on the guidance for the May meeting on the back of the new staff projections.

Full report in PDF.