20/03/2025 Market Watch

Fed Signals Rate Cuts Amid Inflation Concerns

The Federal Reserve's latest projections indicate slightly higher inflation and slower economic growth for this year and next. However, the median forecast still suggests two interest rate cuts in 2024, similar to December’s outlook. The Fed also announced a reduction in the pace of its balance sheet unwinding, reinforcing a dovish stance. Despite this, inflation risks remain elevated, and the decision to maintain the two rate cuts was more uncertain than before. Markets responded with a stronger US dollar, gaining against all G10 currencies, particularly the Australian, New Zealand, and Scandinavian currencies. Most emerging market currencies also declined, except for a few in the Asia-Pacific region. Meanwhile, the Swiss National Bank cut its deposit rate to 0.25%, making it the lowest among major central banks, surpassing Japan’s rate.

The Bank of England is widely expected to keep interest rates unchanged, with a potential move later in the year. In equity markets, strong gains of over 1% were seen in Taiwan and Australia, while Hong Kong’s Hang Seng dropped sharply by 2.25%, driven by losses in mainland Chinese companies. The CSI 300 also declined by nearly 1%. In Europe, the Stoxx 600 ended its four-day winning streak, while US index futures showed slight gains. Bond markets saw a decline in yields, with Australian and New Zealand yields falling by 4-5 basis points, while most European yields were down 2-3 basis points, with UK rates declining more sharply by around 5 basis points.

Gold briefly reached a new record high of $3,057.50 before profit-taking pushed prices slightly lower. Oil prices remained stable, with May WTI hovering just above $67.

United States of America

Overview

The Federal Reserve held interest rates steady and maintained its projection for two rate cuts in 2025, despite revised forecasts indicating slower growth and slightly higher inflation. The Fed also adjusted its balance sheet reduction strategy, lowering the amount of Treasuries rolling off each month. Meanwhile, the US dollar fluctuated but remained firm, with the Dollar Index testing key resistance levels.

Economic Drivers

The Fed’s latest economic projections reflect slower growth, rising unemployment, and persistent inflation concerns:

• GDP Growth: Lowered to 1.7% for 2024 (previously 2.1%) and 1.8% for 2025 (previously 2.0%).
• Unemployment Rate: Revised up to 4.4% for 2024 (from 4.3%), while 2026-2027 projections remain at 4.3%.
• Inflation (PCE): Raised to 2.7% for 2024 (previously 2.5%) and 2.2% for 2026 (previously 2.1%).
• Balance Sheet Reduction: Monthly Treasury roll-off reduced from $25 billion to $5 billion, while mortgage-backed securities (MBS) will continue declining at $35 billion per month.
• Economic Divergence: Chair Powell highlighted a contrast between soft data (surveys) showing weakness and hard data indicating resilience, contributing to heightened uncertainty.

Data and Events

Upcoming data releases will provide further insights into the labor market and economic momentum:

1. Weekly Jobless Claims: A key indicator covering the reference period for nonfarm payroll and establishment surveys.
2. Philadelphia Fed Survey (March): Expected to shed light on regional manufacturing conditions.
3. Index of Leading Economic Indicators: Previously signaling recession, but now back to mid-2022 levels.
4. February Existing Home Sales: High prices, rising interest rates, and declining consumer confidence suggest a significant slowdown, with forecasts predicting a 3.2% monthly decline, adding to an 8% drop since January.

Price Action

The US dollar remains firm, with the Dollar Index testing the 104.00 resistance level. A sustained move above this level could signal a bottoming pattern rather than continued consolidation. Treasury yields and market sentiment remain sensitive to economic data and Fed policy expectations.

Key Points:

• The Fed kept interest rates unchanged and reaffirmed expectations for two rate cuts in 2025.
• Growth forecasts were revised lower, while inflation projections were raised slightly.
• The Fed adjusted its balance sheet reduction, scaling back Treasury roll-offs.
• Jobless claims, the Philadelphia Fed survey, and existing home sales data are key focus points.
• The US dollar remains strong, with the Dollar Index testing key resistance at 104.00.

Australia

Overview

The Australian dollar initially dipped to a session low near $0.6320 before rebounding above $0.6360 following the Federal Reserve’s policy announcement. However, weak Australian employment data triggered another sharp decline, sending the currency below $0.6300, its lowest level of the week. The disappointing jobs report has increased market expectations for a potential rate cut in May.

Economic Drivers

Weak labor market data and shifting rate expectations weighed on the Australian dollar:

• Employment Change: Instead of gaining 30,000 jobs as expected, Australia lost nearly 53,000 positions in February.
• Full-Time Jobs: Declined by nearly 36,000, reversing January’s increase.
• Unemployment Rate: Remained unchanged at 4.1% due to a lower participation rate.
• Participation Rate: Dropped from 67.2% to 66.8%, partially offsetting the impact on the unemployment rate.
• Rate Cut Expectations: A weaker labor market increases the likelihood of the Reserve Bank of Australia cutting interest rates in May.

Data and Events

Upcoming economic data will be closely monitored for further signs of weakness:

1. March Employment Report: Confirmation of labor market trends could solidify rate cut expectations.
2. RBA Meeting Minutes: Insights into policymakers’ assessment of economic conditions.
3. CPI Inflation Data: Key for determining whether inflation pressures allow for a rate cut.
4. US Economic Indicators: Broader risk sentiment and Federal Reserve policy could influence the Australian dollar.

Price Action

The Australian dollar briefly recovered but remains under pressure, breaking below $0.6300 following the weak jobs report. Key support is now around $0.6260–$0.6270, with further downside possible if economic conditions deteriorate.

Key Points:

• The Australian dollar fell below $0.6300 after a weak jobs report.
• February saw a net job loss of 53,000, contrary to expectations of a gain.
• A declining participation rate kept the unemployment rate steady at 4.1%.
• Market expectations for an RBA rate cut in May have increased.
• Key technical support lies at $0.6260–$0.6270.

Canada

Overview

The US dollar fluctuated against the Canadian dollar, initially reaching session highs near CAD1.4350 before pulling back to CAD1.4300 following the Federal Reserve’s decision. However, renewed buying interest lifted it to a three-day high near CAD1.4375, surpassing its 20-day moving average. Further gains could see the pair targeting the CAD1.4450 level. Meanwhile, Canada’s inflation surged beyond expectations, while upcoming US tariffs pose a risk to the Canadian economy.

Economic Drivers

The Canadian dollar faced pressure due to inflation concerns and trade uncertainties:

• Inflation: Consumer prices rose 1.1% last month, nearly double expectations, partially due to the end of a sales-tax holiday.
• Interest Rate Expectations: Canada’s policy rate currently stands at 2.75%, with the swaps market projecting a decline to 2.25% by year-end.
• US Tariffs: The US is set to impose reciprocal tariffs on April 2, affecting a broad range of goods, including those subject to VAT, wage differentials, and sectoral trade barriers. These could significantly impact Canadian exports and economic growth.

Data and Events

Key upcoming data and events will influence market expectations:

1. Canadian GDP Report: An essential indicator of economic momentum and potential policy shifts.
2. Bank of Canada Meeting: Insight into the central bank’s stance on inflation and interest rates.
3. US Tariff Implementation (April 2): Confirmation of the scope and impact of tariffs on Canadian trade.
4. US and Canadian Labor Market Data: Job market strength will play a crucial role in shaping monetary policy.

Price Action

The US dollar is gaining traction against the Canadian dollar, trading above its 20-day moving average near CAD1.4375. If bullish momentum continues, the next resistance level is around CAD1.4450. However, any signs of economic resilience in Canada or shifts in trade policy could limit further upside.

Key Points:

• The US dollar rebounded to a three-day high against the Canadian dollar.
• Canada’s inflation rate surged 1.1%, nearly double expectations.
• The Bank of Canada’s policy rate is expected to decline from 2.75% to 2.25% by year-end.
• US tariffs set for April 2 pose a significant threat to the Canadian economy.
• The CAD1.4450 level is a key resistance point for USD/CAD.

China

Overview

China kept its key loan prime rates unchanged despite improving stock market conditions, a steady yuan, and higher 10-year yields. The one-year loan prime rate remained at 3.10%, while the five-year benchmark stayed at 3.60%. This decision reduces the likelihood of a rate cut for the one-year Medium-Term Lending Facility (MLF) rate next week. Meanwhile, the yuan continues to trade near recent lows against the US dollar, with the People's Bank of China (PBOC) setting the reference rate at CNY7.1754.

Economic Drivers

Several key factors influenced the PBOC’s decision to hold rates steady:

• Stock Market Strength: A rally in Chinese equities reduces the immediate need for monetary easing.
• Yuan Stability: The yuan remains firm, limiting pressure for intervention.
• Bond Yields: The 10-year yield is about 30 basis points above recent lows, suggesting improved economic confidence.
• Monetary Policy Approach: Maintaining the loan prime rates suggests a cautious stance on further easing.

Data and Events

Several upcoming events will shape market expectations regarding China’s monetary policy:

1. PBOC’s Medium-Term Lending Facility (MLF) Rate Decision: A cut is now less likely given the steady loan prime rates.
2. US-China Economic Data: Global economic trends could impact the PBOC’s policy stance.
3. Yuan Reference Rate Adjustments: The recent trend of gradual changes in yuan fixing could signal increased currency flexibility.

Price Action

The US dollar remains near its recent lows against the yuan, with the PBOC adjusting the reference rate slightly to CNY7.1754. Against the offshore yuan, the dollar is trading toward the upper end of its short-term range at CNH7.2150-CNH7.2500, indicating a possible test of resistance levels.

Key Points:

• China left its one-year and five-year loan prime rates unchanged.
• Stock market gains, yuan stability, and higher bond yields reduced the need for a rate cut.
• The likelihood of an MLF rate cut next week has diminished.
• The PBOC continues small adjustments to its yuan reference rate, hinting at greater flexibility.
• The offshore yuan is trading near the upper end of its recent range against the US dollar.

Europe

Overview

The euro struggled to hold gains after bouncing from session lows near $1.0860 following the Federal Reserve’s meeting. It failed to break above $1.09 and has since moved lower, testing fresh support levels around $1.0825-$1.0830. Meanwhile, Germany’s Bundesrat is set to approve a new fiscal initiative, and the upcoming EU summit will discuss further defense and infrastructure spending. In Switzerland, the Swiss National Bank (SNB) cut its deposit rate to 0.25%, with markets viewing this as the likely terminal rate unless inflation trends force another move.

Economic Drivers

The euro’s performance is influenced by fiscal policy developments and monetary policy shifts:

• German Fiscal Policy: The Bundesrat is set to approve new spending measures.
• EU Fiscal Discussions: Leaders will explore national-level spending increases but are unlikely to agree on a collective bond for defense.
• Swiss National Bank Rate Cut: The SNB halved its deposit rate to 0.25%, aligning with market expectations.
• Swiss Inflation Trends: With EU-harmonized CPI at just 0.1% year-over-year in February, the central bank’s policy path may depend on further inflation declines.
• Currency Impact: A strengthening franc against the euro could prompt additional monetary action from the SNB.

Data and Events

Key upcoming events will shape market sentiment:

1. Germany’s Bundesrat Fiscal Decision (Tomorrow): Expected approval of a new economic package.
2. EU Summit (Next Thursday): Focus on defense and infrastructure spending, with discussions on potential joint procurement of military equipment.
3. Swiss Inflation Data: Any further decline in inflation could raise expectations for another SNB rate cut.
4. Eurozone Economic Data Releases: GDP growth and inflation figures will be closely watched for policy implications.

Price Action

The euro remains under pressure, failing to hold above $1.09 and now trading below yesterday’s lows. Key support lies in the $1.0825-$1.0830 range. A further breakdown could expose additional downside, while resistance remains near $1.09. The Swiss franc’s movement against the euro will also be monitored, as renewed appreciation could influence SNB policy.

Key Points:

• The euro failed to sustain gains and is testing support near $1.0825-$1.0830.
• Germany’s Bundesrat is set to approve fiscal measures, while the EU summit will focus on defense and infrastructure spending.
• The Swiss National Bank cut its deposit rate to 0.25%, likely reaching its terminal level unless inflation declines further.
• Swiss inflation remains extremely low at 0.1% (EU harmonized), which could impact future monetary policy.
• The euro’s performance hinges on fiscal policy decisions and technical support levels.

Japan

Overview

The US dollar experienced significant fluctuations against the Japanese yen, initially breaking above JPY150 before reversing sharply and falling below JPY148.75. Selling pressure extended the decline, briefly pushing the dollar below JPY148.20. However, the dollar found support in Europe and stabilized. Attention now shifts to Japan’s upcoming inflation report, though market expectations have been largely shaped by the previously released Tokyo CPI data.

Economic Drivers

The dollar-yen exchange rate has been influenced by shifting market sentiment and Japan’s inflation dynamics:

• Volatile Dollar Trading: The dollar initially surged above JPY150 before reversing sharply, signaling potential selling pressure.
• Japanese Inflation Trends: Government subsidies for household energy consumption have distorted inflation data, making it difficult to gauge true price trends.
• Core Inflation Easing: After increasing in the three months through January, both headline and core inflation (excluding fresh food) likely slowed in February.

Data and Events

Upcoming economic releases and events will play a key role in determining market direction:

1. Japan’s February CPI (Tomorrow): Expected to confirm the inflationary trend indicated by Tokyo CPI.
2. US Economic Data Releases: Potential impacts on global risk sentiment and dollar positioning.
3. Bank of Japan Policy Outlook: Any signals on policy adjustments could influence yen strength.

Price Action

The dollar initially broke above JPY150 before reversing sharply, setting a new low for the week near JPY148.20. Despite a brief rebound in European trading, the trend remains uncertain. A sustained move below JPY148 could signal further downside, while resistance remains at JPY150.

Key Points:

• The dollar-yen pair saw sharp volatility, initially breaking JPY150 before dropping below JPY148.20.
• Japan’s inflation data, distorted by government subsidies, is expected to show easing in February.
• Market sentiment is shaped by Tokyo CPI and broader US dollar trends.
• Key resistance remains at JPY150, with downside support near JPY148.
• Japan’s February CPI release will be a focal point for yen traders.

United Kingdom

Overview

The British pound has tested support around $1.2950 over the past two sessions, briefly reaching a new high for the year near $1.3015 before pulling back. A break below $1.2940 could lead to a test of $1.2900, while resistance extends toward $1.3050. The UK’s latest employment data showed slight softening in wage growth, but the labor market remains stable. Despite this, the Bank of England (BoE) is not expected to cut rates today, though market expectations suggest two rate cuts later this year.

Economic Drivers

Sterling’s movement is influenced by UK labor market conditions and monetary policy expectations:

• Wage Growth: Average weekly earnings, including bonuses, slowed to 5.8% from 6.1%, while earnings excluding bonuses remained steady at 5.9%.
• Unemployment Rate: Held at 4.4%, the upper end of its post-pandemic range.
• Jobless Claims: Increased for the second consecutive month in February, following consistent declines in Q4 2024.
• Payrolled Employment: Rose by 21,000, contrasting with expectations of a 21,000 decline.
• Interest Rate Outlook: Governor Bailey acknowledges economic risks but does not see an imminent rate cut. However, the swaps market anticipates two cuts this year.

Data and Events

Key developments that could influence sterling and BoE policy expectations:

1. Bank of England Decision (Today at 8 AM ET): No rate cut expected, but policy guidance will be closely analyzed.
2. UK Inflation and Economic Growth Reports: Upcoming data releases will provide insight into price pressures and economic activity.
3. Global Trade and Inflation Trends: BoE acknowledges risks from trade wars, which could affect UK inflation and economic outlook.

Price Action

Sterling briefly touched $1.3015 before retreating, with key support at $1.2940. A break below could trigger further downside toward $1.2900. Resistance remains near $1.3050, a level last seen after the US election. Market sentiment is cautious ahead of the BoE decision.

Key Points:

• Sterling tested $1.3015 but pulled back, with support at $1.2940 and resistance at $1.3050.
• UK wage growth softened slightly, but the unemployment rate remained stable at 4.4%.
• Jobless claims rose for the second month, while payrolled employment unexpectedly increased.
• The BoE is not expected to cut rates today, but markets anticipate two cuts later this year.
• Trade war risks add uncertainty to the UK’s economic outlook.