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Inflation and retail sales figures for March are the focal point for traders in the United States next week. The consumer price index (CPI) is released on Tuesday and retail sales on Thursday, both due at 12:30 GMT. The two datasets will likely reinforce expectations that the Federal Reserve will step on the brakes hard over the coming months to cool an overheating economy. But with investors already pricing in almost nine more 25-basis-point rate increases to come in 2022, can the US dollar find much upside from the numbers?

CPI probably topped 8% in March

The pressure will be on for Fed policymakers as inflation is expected to exceed 8.0% for the first time since January 1982. After hitting 7.9% in February, the annual rate of CPI is projected to have reached 8.3% in March. The core figure, which excludes food and energy prices, is forecast to have edged up from 6.4% to 6.6% year-on-year.

Before Russia’s invasion of Ukraine, many market participants, as well as the Fed, were hoping that inflationary pressures would begin to subside at some point in the spring. But that’s not looking very likely following the massive upsurge in energy and commodity prices that was triggered by the West’s heavy sanctions on Russian exports.

How much longer will US consumers keep spending?

Although the US is energy independent and not very reliant on other imports from Russia, there are worries that soaring consumer prices will curb household spending as wages will struggle to keep up with inflation. However, that impact has yet to be felt and consumers probably continued to spend in March.

Retail sales are expected to have risen by 0.6% month-on-month in March, accelerating from the prior 0.3% rate. A pickup in average hourly pay over the last year and excess savings from the pandemic stimulus checks are likely supporting consumption for now. But the savings ratio is already close to dropping towards the historical average and it’s only a matter of time before the wage increases start to fall even more behind the pace of inflation. So the rosy picture may not last much longer.

Fed on course to hike rates by 50 bps

Nevertheless, that’s not going to stop the Fed from pressing ahead with a series of rate increases this year and next week’s data will be taken as another green light by policymakers that the economy is robust enough to withstand a fast tightening in policy.

The US dollar has rallied sharply since late February on the back of the combined boost from safe-haven demand and intensifying rate hike bets. Its gains have been the strongest against the Japanese yen, which has come under intense pressure due to the Bank of Japan’s yield cap.

Can the dollar reclaim the 125-yen level?

Dollar/yen hit a 6½-year of 125.10 on March 28 and the pair could re-challenge that peak if both the inflation and retail sales reports beat expectations. The Fed holds its next rate-setting meeting on May 3-4 so these will be the last crucial releases before then for FOMC members to gauge the strength of the economy and for investors to ramp up their bets of a 50-bps rate hike.

There is a risk, however, that with markets so heavily priced for an aggressive Fed, any softness in the data might spark some profit-taking. In such a scenario, dollar/yen could slip towards the 121 level, which is the 261.8% Fibonacci extension of the January downleg.

Markets

This week turned out far more interesting than one could have guessed at the start. The economic calendar was empty but for the meeting minutes from the Fed and ECB March policy gathering. And they had quite some market implications. Those from the Fed gave us a sneak peek at the balance sheet roll-off blueprint. It intends to shed bonds at a cruising speed of $95bn per month at minimum with a three-month break-in period. Hawkish comments from Fed heavyweight and now-former dove Brainard suggested the process could start in May. Economic data this week including the services ISM and weekly jobless claims suggest the US is more than resilient enough. That rapid quantitative tightening caused a weekly bear steepening in US yields. The short end (2y) is up 6 bps for the week, realizing all those gains today. Long US bond yields jumped 28 bps (30y) to 31 bps (10y) higher, today’s +3bps moves included. Back in Frankfurt, “many” ECB members wanted immediate further steps to normalize policy in March. “Some” argued for a hard end date of net purchases by the summer or risk falling behind the curve. Doing so would clear the way for a rate hike in Q3. With inflation having shot up again in March to 7.5%, the hawks have the numbers on their side. We look out for them to leave their mark on the ECB policy meeting next week. European swap yields this week rose sharply, owing a big chunk to today’s bear flattener (2y: +8.5 bps, 10y: +5.5 bps, surpasses 2015 1.37% resistance). In a weekly perspective, the 2y added almost 18 bps while the 10y jumped over 20 bps. All of the maturities in between hit new cycle and multi-year highs. Aggressive central bank talk weighed on equities: the S&P500 inched 1.4% lower, the EuroStoxx50 is down 2.2% for the week. The euro will probably try to forget the week as soon as possible. EUR/USD slipped from 1.104 on Monday to 1.0852 today in a losing streak that dates back to last week. Unlike bonds, the euro is cautious to frontrun the ECB’s policy intentions. It wants money on the table. It’s also the result of a strong dollar. The trade-weighted DXY is heavily testing the 100 figure for the first time since May 2020. The technical picture of EUR/USD does not look well either. A return to the 2022 low of 1.0806 is likely. Trading in EUR/GBP followed EUR/USD in lockstep for most of the week, except today. EUR/GBP rises from an intraday low at 0.8307 to 0.8335 currently. Perhaps we’re seeing some spillovers from the strong USD in cable. GBP/USD slides towards the 1.30 support zone. Next week provides us with a thorough economic update on the UK (CPI, labour market report, industrial production). Perhaps this gives sterling some impetus. For Central-Europe we retain the HUF smackdown in the wake of Orban’s re-election and the EU kicking off the rule-of-law procedure while the NBP in Poland raised rates by a more-than-expected 100 bps with more to come.

News Headlines

The Food Price Index of the Agriculture Organisation of the UN (FAO) in March reached the highest level since its inception in 1990. The index rose an additional 12.6% after already reaching a record level in February. The index stands 33.6% higher compared to March 2021. Cereals rose 17.1% on a monthly basis largely driven by the war in Ukraine. Russian and Ukraine combined account for around 30% and 20% of global wheat (+19.7% m/m) and maize (19.1% m/m) exports according to FAO. Vegetable oils jumped 23.2% m/m. More modest rises were recorded for sugar (6.7% m/m), meat (4.8%, also all-time high) and dairy (+2.6% m/m, but also up 23.6% y/y).

Hungarian headline inflation in March printed slightly lower than expected. However, at 1.0% M/M and 8.5% Y/Y (8.3% Y/Y in February) price pressures persist. Even more, core CPI as published by the MNB rose further from 8.1% Y/Y tot 9.1% Y/Y. The MNB indicated that prices for three main groups rose at a substantially faster pace than can be expected according to the seasonal pattern. Industrial goods (1.2% M/M & 8.4% Y/Y) prices were still propelled by the global shortage of semiconductors and the rise in commodity prices. Market services prices rose 0.8% M/M and 7.2%Y/Y. Food gained 2.2% M/M and 13.9% Y/Y. The forint rebounds to EUR/HUF 375.75, compared to a level of EUR/HUF 382 intraday yesterday. However, this was probably inspired by a statement of the Finance Ministry that suggested a positive developed in talks with the EU on the ‘rule of law’ procedure, rather than by the data.

The Canadian labour market gained 73k positions in March, with full-time employment up 93k.

The unemployment rate dropped by 0.2 percentage points, to 5.3% (a record low!). The participation rate was little changed at 65.4%.

By industry, services-producing employment rose 42k, with food services leading the way, up 15k. Meanwhile, employment increased in the goods-producing sector (31k), with the construction industry (14k) once again driving gains.

Employment was up in four provinces, Ontario (35k), Quebec (27k), New Brunswick (4k), and PEI (0.8k). Declines were seen in Newfoundland and Labrador (-2.9k), Saskatchewan (-4.5k), and Manitoba (-4.2k).

Lastly, total hours worked rose 1.3% month-on-month and wages were up 3.4% year-on-year.

Key Implications

The good times keep on rolling for the Canadian labour market. After last month's massive jobs gain, some slowing in job growth was expected. But with over 70 thousand new jobs gained and an unemployment rate at 5.3%, the Canadian economy keeps pushing the boundaries of maximum employment. This tight labour market should continue to push wages higher in the coming months. In our view, there is a lot of room for wages to catch-up as Canadian's have seen their purchasing power eroded alongside the rapidly rising cost of living.

The Bank of Canada won't need any more convincing, as it is well justified to hike its policy rate by 50 basis points on Wednesday. We are expecting hawkishness from the Bank as it is likely to signal many more rate hikes over the rest of this year. Canadian yields are jumping once again this morning, with the CA2Y yield (a monetary policy signal) up 9 basis points and the CA10Y yield up 8 basis points.

The USDJPY continues to trend higher and extend uninterrupted recovery from a higher base at 121.27 (Mar 30/31) into sixth straight day, on track for the fifth consecutive strong weekly gains.

Today’s acceleration cracked pivotal Fibo resistance at 124.19 (76.4% of 125.09/121.27 pullback) close above which would confirm that corrective phase is over.

Bulls pressure the last obstacle at 124.30 (Mar 29 high), to open way for test of 125.09 (2022 peak), the highest in nearly 7 years and key longer term barrier at 125.84 (2015 high).

Technical studies are firmly bullish on daily and weekly chart, pointing to underlying bullish structure, however, overbought conditions on both timeframes, warn that bulls may pause for a consolidation under key barriers before resuming.

Dips should offer better buying levels, with solid supports at 123.10/122.70 expected to ideally contain, although deeper dips cannot be ruled out.

Near-term bias will remain with bulls while the action holds above key support at 121.27, but caution if the price approaches this level, as break lower would sideline bulls on completion of daily failure swing pattern.

Res: 124.50; 125.09; 125.84; 126.50.
Sup: 123.60; 123.10; 122.70; 122.20.

Daily Pivots: (S1) 1.0850; (P) 1.0895 (R1) 1.0924; More...

No change in EUR/USD's outlook and intraday bias stays on the downside for retesting 1.0805 low first. Firm break there will resume larger down trend from 1.2248. Next target is 61.8% projection of 1.1494 to 1.0805 from 1.1184 at 1.0758, and then 100% projection at 1.0495. On the upside, above 1.0987 minor resistance will mix up the outlook and bring recovery.

In the bigger picture, the decline from 1.2348 (2021 high) is expected to continue as long as 1.1494 resistance holds. Firm break of 1.0635 (2020 low) will raise the chance of long term down trend resumption and target a retest on 1.0339 (2017 low) next. Nevertheless, break of 1.1494 will maintain medium term neutral outlook, and extending term range trading first.

Daily Pivots: (S1) 123.63; (P) 123.81; (R1) 124.16; More...

USD/JPY's rebound from 121.27 extends higher today but stays below 125.09 high. Intraday bias remains neutral first. Outlook stays bullish with 121.17 support intact and further rise is expected. On the upside, break of 125.09 will target 125.85 long term resistance. Firm break pave the way to 130.04 long term projection level. However, break of 121.17 will turn bias back to the downside for deeper pull back.

In the bigger picture, up trend from 98.97 (2016 low) in in progress for retesting 125.85 (2015 high). Sustained break there will confirm long term up trend resumption. Next target will be 61.8% projection of 75.56 (2011 low) to 125.85 (2015 high) from 98.97 at 130.04. This will now remain the favored case as long as 116.34 resistance turned support holds.

Daily Pivots: (S1) 0.9325; (P) 0.9336; (R1) 0.9355; More....

Intraday bias in USD/CHF remains neutral with focus on 0.9380 resistance. Firm break there will indicate that fall from 0.9459 has completed with three wave down to 0.9193. Such development will revive near term bullishness and turn bias back to the upside for 0.9459 and then 0.9471 resistance. On the downside, however, below 0.9280 minor support will turn bias to the downside for 0.9193 support support next.

In the bigger picture, medium term outlook will be neutral at best as long as 0.9471 resistance holds. Larger down trend could still extend through 0.8756 (2021 low). However, firm break of 0.9471 will argue that whole down trend form 1.0342 (2016 high), has completed with waves down to 0.8756. A medium term up trend should be set up to target 1.0237/0342 resistance zone.

Daily Pivots: (S1) 1.3049; (P) 1.3077; (R1) 1.3103; More...

GBP/USD drops notably today and focus is now on 1.2999 low. Firm break there will resume larger down trend from 1.4248. Next target is 61.8% projection of 1.3641 to 1.2999 from 1.3297 at 1.2900. In any case, outlook will stay bearish in case of recovery.

In the bigger picture, current development suggests that the up trend from 1.1409 (2020 low) has completed at 1.4248. Decline from 1.4248 could still be a corrective move, or it could be the start of a long term down trend. In either case, deeper decline would be seen back to 61.8% retracement of 2.1161 to 1.1409 at 1.2493. In any case, break of 1.3748 resistance is needed to indicate medium term bottoming, or outlook will stay bearish.

Canadian Dollar rises slightly after solid job data, but Dollar is also firm. The greenback is on track to end as the strongest one for the week, with help from extended rally in treasury yields. On the other hand, Sterling is under some selling pressures but Euro is still the worst performing one. Aussie is pressing a near term support against the greenback and break there could erase more of this week's gains.

Technically, technically, a focus will be on USD/JPY before weekly close. Rebound from 121.27 is extending and should be targeting 125.09 resistance. Firm break there will resume larger up trend from 102.58. There is prospect for that to happen even before close, if the pre-market rally in US yields would sustain and extend.

In Europe, at the time of writing, FTSE is up 1.09%. DAX is up 1.06%, CAC is up 0.95%. Germany 10-year yield is up 0.027 at 0.710. Earlier in Asia, Nikkei rose 0.36%. Hong Kong HSI rose 0.29%. China Shanghai SSE rose 0.47%. Singapore Strait Times dropped -0.62%. Japan 10-year JGB yield dropped -0.0071 to 0.238.

Canada employment grew 73k in Mar, unemployment rate dropped to record low 5.3%

Canada employment grew 73k, or 0.4% mom, in March, slightly below expectation of 78k. The growth was driven by 93k rise in full-time jobs. Services-producing jobs rose 42k while goods-producing jobs rose 31k.

Unemployment rate dropped -0.2% to 5.3%, lowest on record since 1976. Total hours worked rose 1.3% mom. Average hourly wages rose 3.4% yoy.

CAD/JPY recovers mildly, but stays in consolidation

CAD/JPY recovers mildly after better than expected Canadian job data. But it's just staying well inside consolidation pattern from 110.17. More sideway trading could still be seen. But outlook remains bullish with 96.70 support intact. Larger up trend is expected to resume sooner or later through 100.17 short term top.

In case of upside breakout, next target will be 100% projection of 73.80 to 91.16 from 84.65 at 102.01.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.3049; (P) 1.3077; (R1) 1.3103; More...

GBP/USD drops notably today and focus is now on 1.2999 low. Firm break there will resume larger down trend from 1.4248. Next target is 61.8% projection of 1.3641 to 1.2999 from 1.3297 at 1.2900. In any case, outlook will stay bearish in case of recovery.

In the bigger picture, current development suggests that the up trend from 1.1409 (2020 low) has completed at 1.4248. Decline from 1.4248 could still be a corrective move, or it could be the start of a long term down trend. In either case, deeper decline would be seen back to 61.8% retracement of 2.1161 to 1.1409 at 1.2493. In any case, break of 1.3748 resistance is needed to indicate medium term bottoming, or outlook will stay bearish.

Economic Indicators Update

CAD/JPY recovers mildly after better than expected Canadian job data. But it's just staying well inside consolidation pattern from 110.17. More sideway trading could still be seen. But outlook remains bullish with 96.70 support intact. Larger up trend is expected to resume sooner or later through 100.17 short term top.

In case of upside breakout, next target will be 100% projection of 73.80 to 91.16 from 84.65 at 102.01.