Forex Fundamental Analysis February 19 ~ 24, 2023

We have a few high-impact releases scheduled for the week, including the Prelim GDP release out of US prepared for an exciting trade week.

Tradable news events of the week:

The UK UKash Manufacturing Purchasing Managers’ Index (PMI) is an economic indicator that measures the performance of the manufacturing sector in the United Kingdom. It is based on surveys of purchasing managers across various industries and covers a wide range of business activity, from production to sales, new orders, employment, and inventories. A reading above 50 indicates expansion in the sector; a reading below 50 indicates contraction.

The UK UKash Services Purchasing Managers’ Index (PMI) is an economic indicator that measures the performance of the services sector in the United Kingdom. It is based on surveys of purchasing managers across various industries and covers a wide range of business activity, from sales to new orders, employment, and inventories. A reading above 50 indicates expansion in the sector; a reading below 50 indicates contraction.

The Canada Consumer Price Index (CPI) Month-over-Month (m/m) is a measure of the rate of inflation in Canada. It is based on a survey of consumer prices for a representative basket of goods and services, including food, shelter, clothing, transportation, and many other items. The m/m percentage change indicates the amount that prices went up or down compared to the previous month.

The Reserve Bank of New Zealand’s interest rate decision is the official announcement made by the RBNZ after their Monetary Policy Committee meets. It sets the official cash rate, which affects how much interest banks charge customers on loans and mortgages. The rate can be increased or decreased depending on economic conditions such as inflation, employment, and growth in the economy.

The FOMC Minutes are the official record of the Federal Open Market Committee’s (FOMC) meetings. They provide an in-depth look at the economic and financial conditions discussed by the committee members, their assessments of those conditions and their decisions about setting monetary policy for the United States. The minutes also include detailed analyses of economic relationships, explanations of committee members’ views on various issues, and projections of future economic developments.

US USelim GDP q/q is an abbreviation for the United States preliminary Gross Domestic Product (GDP) report issued quarterly (q/q). It provides a snapshot of the US USonomy over three months, including information on economic growth, investment spending, and consumer spending. The report is released by the Bureau of Economic Analysis (BEA).

Weekly Forex Fundamental Summary

Following a tumultuous week of trading, markets opened relatively quiet this Monday as eyes turned towards Tuesday’s Consumer Price Index announcement. Unfortunately, inflation figures exceeded market expectations; however, equity investors largely remained calm amongst several bouts of volatility during Tuesday’s session.

After the CPI data was unveiled, short-rate hikes were seen, and future markets began to line up more with Federal Reserve prognoses. Forecasts for the terminal rate climbed towards 5.3% in 2021, and it’s even predicted that rates will stay higher than 5% until 2024!

• (US) JAN CPI M/M: 0.5% V 0.5%E; Y/Y: 6.4% V 6.2%E (7th straight deceleration in annual pace but at the high-end of all analysts’ expectation range)
• (US) Atlanta Fed Jan Sticky-CPI annualized 6.3% v 6.3% m/m (revised), core 6.2% v 5.7% m/m

The Empire manufacturing report released in February beat expectations, pushing Treasury yields higher. However, stock markets were unfazed by the rising interest rates; this was exemplified best through the steadfast performance of NASDAQ even during periods that previously saw a dip due to similar rate hikes last year.

• (US) FEB EMPIRE MANUFACTURING: -5.8 V -18.0E (highest in 3 months); Notes employment isn’t expected to increase in the months ahead
• (US) JAN ADVANCE RETAIL SALES M/M: 3.0% V 2.0%E; RETAIL SALES (EX-AUTO) M/M: 2.3% V 0.9%E
• (US) Atlanta Fed GDPNow: raises Q1 GDP from 2.2% to 2.4%

By Friday, stocks were succumbing to the idea that interest rates may not be decreasing anytime soon. This sentiment was perpetuated by producer price data showing greater-than-expected results and jobless claims remaining stubbornly high. In response to this news, Fed officials Mester and Bullard both sent out more powerful messages concerning rate changes in the future.

At the latest FOMC meeting, both representatives preferred a larger rate hike of 50 basis points. However, they declared that they wanted to keep their options open for the next upcoming meeting. Mester’s comments may have been more noteworthy since she is likely to replace Chicago Fed Governor Goolsbee if he is appointed as expected for the Federal Reserve Vice-Chair role.

Last week, the US 10-year yield ended at an impressive 3.8%, while the 2-year exceeded 4.6%. The Dollar index remained close to 104 after reaching a one-month high, yet commodities prices weakened overall. All in all, S&P and DJIA decreased by 0.3% and 0.1% respectively, although Nasdaq rose slightly higher with a gain of 0.6%.

• (US) INITIAL JOBLESS CLAIMS: 194K V 200KE; CONTINUING CLAIMS: 1.696M V 1.695ME
• (US) FEB PHILADELPHIA FED BUSINESS OUTLOOK: -24.3 V -7.5E (lowest since May 2020); New Orders remain solidly in contraction
• (US) Fed’s Mester (FOMC voter): Risks to inflation remain; Saw compelling argument for 50bps hike at last meeting; Too soon to say how much Fed should raise in March; Prefer to avoid surprising the markets
• (US) Atlanta Fed GDPNow: Raises Q1 GDP from 2.4% to 2.5%
• (US) Fed’s Bullard (Non-Voter): Would not rule anything out for next Fed meeting including supporting a 50 bps hike; Favors peak rate of 5.375% and wants to reach it the soonest

Notable Headlines

US

• (US) Fed’s Bowman (voter): Expect that ongoing increases will be appropriate to bring the Fed rate to a sufficiently restrictive level; It will need to remain there for some time to restore price stability
• (US) JAN HOUSING STARTS: 1.309M V 1.355ME; BUILDING PERMITS: 1.339M V 1.350ME
• (US) JAN PPI FINAL DEMAND M/M: 0.7% V 0.4%E; Y/Y: 6.0% V 5.4%E

EU

• (EU) EU Commission Winter Forecasts: Cuts 2023 & 2024 EU inflation forecasts; Notes inflation peak has likely passed
• (EU) ECB chief Lagarde: High inflation continues to have a significant impact, committed to bring inflation back to 2% target

JP

• (JP) JAPAN Q4 PRELIMINARY GDP Q/Q: 0.2% V 0.5%E; ANNUALIZED Q/Q: 0.6% V 2.0%E
• (JP) JAPAN GOVT CONFIRMS TO PROPOSE KAZUO UEDA AS NEW BANK OF JAPAN (BOJ) GOV (as speculated)

UK

• (UK) DEC AVERAGE WEEKLY EARNINGS 3M/Y: 5.9% V 6.2%E
• (UK) JAN CPI M/M: -0.6% V -0.4%E; Y/Y: 10.1% V 10.3%E (3rd straight deceleration in annual pace)

AU

• (AU) AUSTRALIA JAN EMPLOYMENT CHANGE: -11.5K V +20.0KE; UNEMPLOYMENT RATE: 3.7% V 3.5%E [highest unemployment rate since May]

Sentiment Forecast

As we have multiple news releases scheduled simultaneously, we must remain patient and refrain from entering the market until our tradable number has been hit.

Although our trigger may be activated, the market can still move in an unexpected direction due to other news releases. Thus, it’s prudent that we adhere to a Retracement Trade method if we want to maintain a secure position.

As the week kicks off, it appears that the market is exhibiting a bit of softness in regards to JPY. This corroborates my previous assessment from last week which suggested shorting this currency.

With recent FOMC member remarks, USD has proven its resilience. With the GDP report slated for this week, I fully expect to see a further appreciation of the greenback.

As both the GBP and EUR are displaying signs of weakening against the USD, I would advise selling these two currencies in favor of buying US dollars. Although a reversal is not expected to take place immediately, it remains prudent to err on the side of caution for now.

As CAD and NZD are predicted to remain within a specific range, investors should keep their positions short-term and take advantage of quick profits if necessary.

The recent Employment data is highly alarming, paired with the highest Unemployment rate in many years; AUD may continue to depreciate. So it’s safe to say that investors are hesitant about going long on AUD – sound advice for all market traders!