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How strong is the US economy and what will the Fed do about it?

FX markets have opened the week on a steady footing, buoyed by a strong end to last week from equities and appearing to shake off a slightly lower-than-expected growth target from China. This week's focus will very much be on central bankers and activity data - the highlights being Jay Powell's testimony (Tuesday/Wednesday) plus US jobs growth (Friday/Saturday).

USD: How strong is the US economy and what will the Fed do about it?

This week, my focus will be on activity data and the speeches from the Federal Reserve. On Friday/Saturday, I'll be keeping an eye on the release of the US jobs data for February, which will give me a better idea of whether January's surge was a fluke or not. My analysis suggests that it might have been due to seasonal adjustment factors, but I'm not completely certain. Before the jobs data, I'll be checking out Wednesday's JOLTS and ADP data to see if the tight labor market conditions in the US are easing up.

The other important event this week will be the testimony from Federal Reserve Chair Jerome Powell to the Senate on Tuesday/Wednesday and the House on Wednesday/Thursday. Powell will be discussing the Fed's semi-annual monetary policy report, which was released last Friday. I'm interested in hearing his thoughts on re-accelerating the pace of hikes to 50bp from 25bp and any indication on what the terminal rate might be. I think that an upward revision to the Dot Plots will discourage investors from aggressively re-establishing dollar short positions.

There are also central bank policy meetings in Japan, Australia, Canada, and Poland this week. The Reserve Bank of Australia (RBA) is the only one expected to hike rates (+25bp). However, Friday's Bank of Japan (BoJ) meeting will be interesting as well as today's release of Japanese wage data for January. If the BoJ widens its 10-year JGB target band on Friday, it would be a big surprise and drag USD/JPY lower.

Overall, I don't expect too much support for the dollar this week, despite the slightly lower-than-expected Chinese growth target for 2023 at 5.0%. Equities are holding up well despite last week's rise in bond yields, providing a little support to pro-cyclical currencies. I predict that it will be another range-bound week for the dollar, with DXY trading in a 104.00-105.50 range, and local stories might win out.

EUR: ECB helps build the 1.05 EUR/USD floor

The European Central Bank has been vocal about a 50bp hike at the 16 March meeting, which the market has taken as a done deal. However, pricing a further 150bp of tightening by year-end seems a little aggressive. Nonetheless, this tough talk has kept the EURUSD interest rate differential supported at the short end of the market, and the 1.05 support zone for EUR/USD has firmed up this month. I predict that EUR/USD will probably end March in the 1.07/1.08 area. 

Today, I predict that EUR/USD will trade well inside a 1.0600-1.0700 range.

GBP: Steady sterling this week

It's hard to see what could cause a breakout in sterling this week. Even progress on the Windsor Framework deal is unlikely to have a significant impact. Last week, we heard from Bank of England heavyweights Andrew Bailey and Huw Pill, and we don't expect this week's BoE speakers to move the needle on market pricing of the BoE cycle. Overall, I anticipate that EUR/GBP will stay within a 0.8800-0.8900 range, while GBP/USD will be affected by the major events on the US calendar this week.

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ACY Securities Team

ACY Securities Team

ACY Securities

ACY Securities is one of Australia's fastest growing multi-asset online trading providers, offering ultra-low-cost trading, rock-solid execution, technologically superior account management and premium market analysis. The key pi

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