22/03/2025 Week Ahead

Tariffs, Inflation & Central Bank Actions

In the United States, economic indicators will shed light on whether current trade policies, particularly tariffs, are beginning to affect consumer and business confidence. Investors will pay close attention to the Personal Consumption Expenditures (PCE) inflation data, given its potential impact on future interest-rate decisions by the Federal Reserve. Despite earlier concerns, the U.S. dollar has recently stabilized, even as the Fed revised down its growth outlook and slightly raised inflation projections. Although discussions of stagflation have surfaced, most economists remain cautiously optimistic, viewing current price pressures from tariffs as temporary and expecting moderate growth rather than outright contraction.

Europe will also attract significant attention, particularly regarding the UK's upcoming budget announcement, which could influence sentiment amid broader economic uncertainty. Eurozone sentiment will be closely examined, especially following Germany's proposal for significant economic stimulus and anticipated U.S. tariffs, both of which could affect regional economic stability and investor confidence.

In Asia, investors will focus primarily on Japan's latest inflation figures and central bank meeting minutes, offering insights into monetary policy direction. Australia's upcoming budget presentation will clarify its fiscal policy priorities, while China's central bank is expected to announce key decisions regarding policy rates, which could have widespread implications across regional markets.

Meanwhile, inflation data remains a global focal point, with key reports expected from the U.S. (PCE), the UK and Australia (CPI), and Japan (Tokyo CPI). Mexico's inflation reading will also draw attention ahead of its central bank meeting, where analysts widely anticipate a 50 basis point interest-rate cut. Lastly, political developments in Canada will come into play as Prime Minister Carney is expected to call a snap election, potentially influencing short-term market sentiment.

United States of America

Overview

Investors are closely monitoring the U.S. economy this week to gauge the impact of recent tariff announcements and market volatility. Despite mixed economic signals, there's heightened focus on inflation and growth data, which will influence the Federal Reserve's future rate decisions. Although recent indicators suggest some economic weakness, the Fed remains cautious, signaling no immediate urgency to cut rates without consistent supporting data.

Economic Drivers

Key economic drivers currently revolve around trade policies, inflation expectations, and economic growth stability. Recent tariff announcements threaten higher prices and weakened demand, potentially affecting overall growth forecasts. The Fed’s decisions will heavily depend on sustained economic indicators, especially inflation and employment stability.

• Impact of U.S. tariffs increasing price pressures.
• Inflation remaining stubbornly elevated, influencing Fed policy.
• Economic indicators showing mixed but generally softer growth signals.

Data and Events

Several crucial data releases this week will shape market expectations:

1. Monday: Flash Purchasing Managers’ Index (PMI) for manufacturing and services sectors.
2. Tuesday: March Consumer Confidence Index; January Case-Shiller home price index; February new home sales; Treasury auction of $69 billion in two-year notes.
3. Wednesday: February Durable Goods Orders; Treasury auctions of $70 billion in five-year notes and $28 billion in two-year floating-rate notes.
4. Thursday: Weekly Jobless Claims; Treasury auction of $44 billion in seven-year notes.
5. Friday: February Personal Consumption Expenditures (PCE) inflation data, the Fed’s preferred inflation measure.

Price Action

The U.S. Dollar Index has recently stabilized within the 103.20-104.15 range, after falling over 6% since mid-January. Current price action suggests possible short-term stabilization or even potential recovery, driven by stretched momentum indicators and approaching month-end adjustments. Investors will watch closely if the recent consolidation forms a base or merely a temporary pause before another downturn, with key resistance levels near 104.90-105.00.

Key Points:

• U.S. economic data closely watched due to recent tariff volatility.
• Fed unlikely to cut rates immediately without consistent weaker economic data.
• Inflation remains elevated, driven partly by tariffs.
• Important economic data scheduled throughout the week, particularly the PCE inflation measure.
• Dollar Index stabilizing after significant decline, suggesting potential short-term bottoming.

Australia

Overview

This week, Australia's economy is in focus as the Labor government unveils its 2025–26 budget amid election preparations. Markets are concerned about potential increased government spending aimed at appealing to voters, especially with an election due by mid-May. Additionally, investors await critical inflation data to gauge the Reserve Bank of Australia's (RBA) next moves.

Economic Drivers

The key economic factors driving markets are government spending policies and monetary policy decisions by the RBA. High spending levels, particularly ahead of elections, might prompt concerns about inflationary pressures and future interest rate cuts.

• Risk of increased government spending ahead of upcoming elections.
• RBA’s cautious stance after recently cutting rates in February, signaling no immediate plans for aggressive rate reductions.
• Prime Minister Albanese’s rejection of retaliatory tariffs against U.S. steel and aluminum tariffs, protecting trade relationships.

Data and Events

This week's important economic data and events include:

1. Tuesday: Australian government releases the federal budget for 2025–26, closely watched for election-related spending decisions.
2. Wednesday: Release of February's monthly Consumer Price Index (CPI). Annual headline inflation expected to remain stable at 2.5%, with trimmed mean inflation at 2.8%.
3. Friday: Release of Australia's preliminary March Purchasing Managers’ Index (PMI), tracking economic activity. Recent PMI data has shown moderate expansion.

Price Action

The Australian dollar recently weakened after stalling near the key resistance level of $0.6400. The currency has now declined for four consecutive days, closing below $0.6260, its lowest level since early March. Technical indicators suggest a critical support zone near $0.6245-$0.6265; a confirmed break below could trigger a deeper decline towards the $0.6170-$0.6200 area.

Key Points:

• Markets await Australia's budget announcement ahead of mid-May elections.
• Increased government spending could raise inflation concerns.
• Inflation expected to remain steady; important for future RBA decisions.
• Prime Minister Albanese rejects tariffs against U.S., preserving trade ties.
• The Australian dollar faces technical pressure, risk of further declines.

Canada

Overview

Canada’s economy faces uncertainty as markets await key economic data, political developments, and ongoing concerns surrounding U.S. tariffs. The Canadian economy, which benefited from recent rate cuts, now contends with the added pressures from potential new tariffs. Meanwhile, political uncertainty rises as Prime Minister Carney prepares to call a snap election, potentially scheduled for late April or early May.

Economic Drivers

Tariff-related pressures and monetary policy remain fundamental economic drivers. The threat of new U.S. tariffs has negatively impacted Canada's economic outlook, extending expectations for the Bank of Canada's easing cycle.

• U.S. tariffs pose risks to Canada’s economic stability.
• Bank of Canada Governor Tiff Macklem emphasizes controlling inflation, reducing immediate prospects for further rate cuts.
• Swaps market pricing reflects expectations for at least one additional interest-rate cut by July.

Data and Events

Key data and political events to watch include:

1. Friday: Release of Canadian GDP data for January, crucial to understanding economic performance ahead of potential U.S. tariffs. Economists expect significant slowing from Q4 2024's 2.6% annual growth to around 1.6%.
2. Sunday (March 23): Prime Minister Carney anticipated to announce a snap federal election, with the likely date set for late April or early May.

Price Action

The Canadian dollar (USD/CAD) recently showed a mild weakening trend, declining for three consecutive weeks. Currently, the currency pair is consolidating, with key support around 1.4285 and resistance near 1.4475 by month-end. Traders should remain cautious due to the potential for false breaks within this consolidation.

Key Points:

China

Overview

China aims for currency stability rather than significant strength or weakness in the yuan against the U.S. dollar. The People’s Bank of China (PBOC) is cautious about cutting interest rates partly due to concerns about currency stability. Meanwhile, geopolitical tensions persist, particularly around technology competition and key international investments, raising investor concerns over possible trade disruptions and blocked business deals.

Economic Drivers

China’s central bank policy and geopolitical issues are key drivers for the economy, influencing currency stability and investor confidence. There’s pressure to balance economic stimulus needs against the risk of currency volatility.

• Reluctance by PBOC to cut rates to maintain yuan stability.
• Persistent geopolitical tensions, including potential blocking of CK Hutchinson's port sales to BlackRock and BYD’s Mexico plant plans.
• Continued U.S. efforts to restrict China’s technological growth, though Chinese tech breakthroughs continue.

Data and Events

Investors will closely monitor the limited but significant events this week:

1. PBOC Announcement: One-year Medium-Term Lending Facility (MLF) rate expected unchanged at 2.0%; lending volume might increase from last month's CNY 300 billion.
2. Thursday: Industrial profits data for January, with analysts anticipating potential return to positive growth.
3. Summits: China Development Forum and the Boao Forum for Asia will gather top officials, business leaders, and academics to discuss economic strategies and policies.

Price Action

The U.S. dollar strengthened against the offshore yuan last week, marking its first weekly gain in three weeks. It closed above key resistance at CNH 7.2530 and traded above CNH 7.26, indicating potential for further upward momentum. Technical analysis suggests a possible test of higher resistance near CNH 7.2700-7.2725, with the monthly high around CNH 7.3075 potentially in reach if the dollar continues its recovery.

Key Points:

• China prioritizes yuan stability, influencing rate cut decisions.
• Geopolitical risks remain high, particularly regarding technology and strategic investments.
• PBOC expected to hold interest rates steady; lending volume may rise.
• Upcoming industrial profit data will offer insight into economic recovery.
• Dollar strengthening against yuan; watch for possible breakout above CNH 7.2700.

Europe

Overview

Recent hopes of a ceasefire in Ukraine and Germany’s agreement on increased military and infrastructure spending have improved sentiment in the eurozone, reducing immediate downside risks. However, markets have largely priced in these developments. Investors now look to key economic data releases this week to further gauge the region's economic health, with significant attention on inflation expectations, sentiment indicators, and bond auctions.

Economic Drivers

Market sentiment in the eurozone is mainly driven by geopolitical developments and Germany’s substantial fiscal policy changes. Additionally, differences in interest rates between the U.S. and Germany continue to influence currency dynamics and investor decisions.

• Reduced geopolitical risks due to potential ceasefire in Ukraine.
• Germany’s loosening of its fiscal rules ("debt brake") to increase defense spending and infrastructure investment.
• Growing interest rate gap between U.S. and Germany affecting euro strength.

Data and Events

Several important data points and events this week will provide deeper insight into economic conditions:

1. Monday: Flash Purchasing Managers’ Index (PMI) reports for France, Germany, and the eurozone, providing early indicators of economic activity in March.
2. Tuesday: Germany’s Ifo business sentiment index, reflecting the response to recent fiscal policy shifts; the Netherlands holds bond auctions; Germany auctions €4.5 billion in April 2030 Bobl.
3. Wednesday: France’s consumer confidence survey; Spain’s final GDP data for Q4 2024; bond auctions by Germany and Italy.
4. Friday: March flash inflation estimates from France and Spain; Germany’s GfK consumer sentiment index; eurozone business and consumer sentiment surveys; additional Italian bond auctions.

Price Action

The euro recently peaked near $1.0955 but subsequently lost momentum, dropping below the $1.0800 level for the first time in weeks. Given weakening momentum indicators and widening U.S.-Germany yield differentials, the euro may continue facing downward pressure. Technically, the euro could move toward the critical support zone of $1.0700-$1.0725, especially ahead of the upcoming U.S. tariff announcements.

Key Points:

• Improved geopolitical outlook reduces near-term eurozone economic risks.
• Germany’s fiscal expansion boosts market optimism.
• Key economic releases this week include PMIs, inflation data, and consumer confidence surveys.
• Euro under pressure due to widening yield gap with U.S.
• Euro may weaken further, targeting key support near $1.0700-$1.0725.

Japan

Overview

Japan’s economy is currently influenced by shifting interest rate differentials between the U.S. and Japan, recent movements in the yen exchange rate, and uncertainty surrounding upcoming Bank of Japan (BOJ) policy decisions. Investors are closely monitoring economic indicators like Tokyo’s inflation figures and PMI data, as well as developments within the central bank following changes in its policy board and ongoing U.S. tariff concerns.

Economic Drivers

The primary economic factors influencing Japan’s market sentiment include interest rate differentials, central bank policy decisions, and inflation trends. These elements will shape expectations for future monetary policy actions by the BOJ.

• Narrowing interest rate gap between U.S. and Japan influencing yen exchange rates.
• Persistent inflationary pressures, particularly in food prices and services.
• High uncertainty surrounding BOJ monetary policy adjustments amid U.S. tariff risks.

Data and Events

Key data releases and events investors should focus on this week include:

1. Monday: Preliminary Purchasing Managers’ Index (PMI) for March. Although usually less market-sensitive, the PMI provides important signals on economic activity, currently at its strongest levels since August.
2. Tuesday: Bank of Japan releases minutes from its January meeting.
3. Wednesday: Junko Koeda officially joins the BOJ policy board, replacing Seiji Adachi, potentially impacting the central bank’s future stance.
4. Thursday: Ministry of Finance auctions ¥700 billion of 40-year Japanese Government Bonds (JGBs), likely attracting strong demand from institutional investors.
5. Friday: Tokyo’s consumer price inflation (excluding fresh food) for March expected steady at 2.2%; release of the BOJ’s summary of opinions from its March 18–19 meeting.

Price Action

The U.S. dollar strengthened against the yen, briefly trading above the critical ¥150 level, although it has not firmly established itself there. Despite declining U.S. Treasury yields recently, momentum indicators suggest further upside potential in USD/JPY. Provided key support around ¥147.75–148.00 holds, the pair might experience upward pressure ahead of month- and quarter-end, and the upcoming U.S. tariff announcements.

Key Points:

• Yen exchange rate influenced by narrowing U.S.-Japan interest rate differentials.
• BOJ policy outlook uncertain amid changes in policy board membership.
• Tokyo CPI inflation expected stable at 2.2% for March.
• Strong demand anticipated for upcoming 40-year JGB auction.
• USD/JPY has upside potential, particularly if support around ¥147.75 holds.

United Kingdom

Overview

Sterling recently benefited from the weakening U.S. dollar, gaining significantly since January. However, recent domestic policy choices—such as cuts to disability benefits, pensioner allowances, and overseas aid—highlight tensions within the UK government. Markets now await important economic data and Chancellor Rachel Reeves' spring budget announcement, which may influence the economic outlook and monetary policy decisions by the Bank of England (BOE).

Economic Drivers

The primary economic drivers currently influencing the UK economy include fiscal policy decisions, inflation dynamics, and central bank responses to economic conditions.

• Fiscal tightening through spending cuts, including welfare and international aid.
• Continued pressure on inflation despite a slowing economy.
• The Bank of England’s cautious approach to interest rate cuts due to persistently high inflation and wage pressures.

Data and Events

Several key UK economic reports and events scheduled for this week include:

1. Monday: Preliminary Purchasing Managers’ Index (PMI) data for manufacturing and services sectors for March, offering insight into current economic performance.
2. Wednesday: February inflation figures (Consumer Price Index and Producer Price Index); Chancellor Reeves' spring budget statement, expected to include spending reductions to stabilize public finances; revised gilt issuance plan.
3. Thursday: UK Debt Management Office to auction gilts maturing in October 2031.
4. Friday: Revised fourth-quarter GDP figures; February retail sales report; January trade data, including the overall and precious metals-related deficits.

Price Action

Sterling’s upward momentum recently stalled after briefly surpassing $1.30, with a notable decline below $1.29, signaling potential further downside. Technical indicators suggest the currency may now target key support areas, initially near $1.2840 (20-day moving average and 38.2% retracement), with deeper support around $1.2785–$1.2800 (200-day moving average and 50% retracement). This correction aligns with rising UK gilt yields, reflecting increased market caution.

Key Points:

• Sterling's recent strength losing momentum amid fiscal tightening.
• Chancellor Reeves expected to announce budget cuts to manage public finances.
• Inflation figures closely watched to determine future BOE policy moves.
• Upcoming economic data likely to reflect economic moderation.
• Technical indicators suggest sterling faces short-term downside risks towards $1.2800–$1.2840.