Week Ahead: Hawkish ECB may offer EURUSD support

The battle against inflation is set to take center stage across markets in the coming week.

Major central banks such as the European Central Bank, the Reserve Bank of New Zealand, and the Bank of Canada are set to make their respective policy decisions, and perhaps more crucially convey its future policy intentions to investors and traders worldwide.

Market participants will also be digesting the latest consumer price indexes out of major economies such as China, Germany, and the US in the coming week, and what the inflation data could mean for the respective central banks’ policy outlooks.

Here are the major economic data releases and events scheduled for the week ahead:

Monday, April 11

• CNH: China March PPI and CPI
• GBP: UK February GDP, industrial production, and trade balance
• USD: Chicago Fed President Charles Evans speech

Tuesday, April 12

• EUR: Germany March CPI (final), April ZEW survey expectations
• GBP: UK February unemployment, March jobless claims
• Brent: OPEC monthly oil market report
• USD: US March CPI
• USD: Fed speak – Fed Governor Lael Brainard, Richmond Fed President Thomas Barkin

Wednesday, April 13

• CNH: China March external trade
• NZD: RBNZ rate decision
• GBP: UK March CPI
• CAD: Bank of Canada rate decision
• S&P 500: US earnings season kicks off with JPMorgan Chase Q1 earnings
• US crude: EIA weekly US crude inventories

Thursday, April 14

• AUD: Australia March unemployment, April inflation expectations
• EUR: ECB rate decision
• US stocks: Wells Fargo, Citigroup, Morgan Stanley, Goldman Sachs earnings
• USD: US weekly initial jobless claims, March retail sales, April consumer sentiment
• USD: Fed speak – Cleveland Fed President Loretta Mester, Philadelphia Fed President Patrick Harker

Friday, April 15

• UK and US markets closed for Good Friday
• USD: US March industrial production

 

The European Central Bank is set to leave its policies unchanged in the week ahead.

Still, EUR traders are ready to react to what the ECB says about its plans to battle record-high inflation.

Note that a currency tends to strengthen when its central bank appears more eager about removing support for the economy (a.k.a. hawkish).

The ECB intends to eventually wind down support for the economy and isn’t ruling out a rate hike before 2022 is over. Yet, markets are doubting how much the ECB can actually tighten its policy, given that the EU’s economic outlook grows darker the longer the Russia-Ukraine war persists.

If the ECB can convince markets in the coming week that policymakers can press on with raising rates later this year, despite the ongoing security crisis, that could offer some relief for the euro with EURUSD perhaps clawing its way back up to 1.10. Otherwise, the world’s most popular currency pair could break below 1.080 for the first time since May 2020.

 

Gold’s $1920s support to finally give way?

Gold has long been deemed a hedge against inflation.

However, with faster inflation also comes greater prospects of US interest rates and Treasury yields climbing faster which weigh on the zero-yielding bullion.

Still, the precious metal has been able to hold its own, thanks to resilient demand for safe haven assets amid the ongoing Russia-Ukraine war. The conflict is darkening the global economic outlook and raising the risk of a policy error by major central banks (a central bank that raises rates too fast in a bid to quell red-hot inflation may instead trigger a recession).

These persisting fears and uncertainties ensure that safe havens such as gold remain well bid, with the $1920 region demonstrating its worth as an immediate support level – also where a key Fibonacci retracement level resides.

Gold is in search for a clear reason to either move upwards or downwards from here.

If the US March consumer price index, which is expected to post a new four-decade high at 8.4%, prompts markets to believe that the Fed has to be more aggressive and raise rates by 50 basis points in May (as opposed to the customary 25-basis point moves), that could trigger the next leg down for gold prices.

A breakdown past the psychologically-important $1900 level could then bring the $1877 region as the next area of interest for gold bears. $1877 marks the next Fibonacci support level and also the November high for spot prices.

 

Larger-than-expected RBNZ hike could see NZDUSD moving back closer to 0.70

The Reserve Bank of New Zealand is widely expected to raise its official cash rate by yet another 25 basis points next week, having already raised by 75 basis points since October.

However, a 50 basis point hike remains a possibility.

Such a larger-than-usual move by the RBNZ could see NZDUSD breaking above its 200-day simple moving average and moving back closer to 0.70.

That psychologically-important mark is also where its 50% Fibonacci retracement level resides from the February 2021 to January 2022 decline.

A move upwards for NZDUSD would buffer the Kiwi’s year-to-date gains against the US dollar, which currently stands at 0.5%, with NZD being one of a handful of G10 currencies that can still boast of year-to-date gains versus the buck.

 

Can US earnings season aid S&P 500 recovery?

The next US earnings season is just round the corner, with Wall Street banks kicking things off in the week ahead.

Note that financial stocks account for almost 11% of the S&P 500, and could set the tone for how US stocks perform in the weeks ahead as the earnings season rolls along.

The S&P 500 seems to have found support around its 200-day simple moving average of late, and could use fresh catalysts to recover closer towards its record high.

Market participants will be eager to find out not just how US companies fared over recent months, but also what CEOs and CFOs convey about their respective company earnings outlooks.

This earnings season is set to feature these hot talking points and how they’ll impact earnings moving forward:

• Rising wages/inflation
• Supply-chain constraints
• China’s ongoing lockdowns
• Russia-Ukraine war
• Central bank policy normalisation and its impact on economic growth/consumption

Stock bulls would be heartened to know that, according to FactSet, analysts are raising their earnings estimates for the 2022 calendar year, despite lowering their estimate for Q1 earnings.

In other words, perhaps the ‘worst’ is already behind us and things could be looking up, at least from an earnings perspective.

Analysts also have the most ‘buy’ ratings on S&P 500 stocks since 2010. Of the 10,821 ratings on S&P 500 stocks (as of end-March), more than half (57.3%) of those ratings were ‘buys’, with analysts most optimistic for stocks in the energy, IT, and communication services sectors – in that order.

This earnings season may either provide a stronger impetus to restore the S&P 500 closer to its record high, or offer mere fleeting relief before stocks finally succumb to the downside risks.

The week and weeks ahead should prove telling.

 

 

inflation ECB European Central Bank Euro EURUSD rate hikes FED FOMC Federal Reserve Gold Bullion XAUUSD NZDUSD RBNZ Reserve Bank of New Zealand Kiwi