Last week, the Japanese raised interest rates by a well-telegraphed and symbolic 0.1%, thus ending an era of negative interest rates. The market reaction was to sell yen.
The shock of the week was the Swiss National Bank’s decision to cut interest rates by 0.25%. It caught the market off guard and the Swiss franc initially weakened by nearly 1% against most major currencies.
The current inflation and interest rate scenario for major currency pairs is posted below.
The trend generally for inflation has been lower save for Japan where inflation spiked in February. In the US, headline inflation is bouncing along slightly above 3%. PCE- the Fed’s preferred measure has been falling and this has been making the doves excited, although there is rather too much uncertainty as to its trajectory as a host of other factors point to the US economy being strong and so stoking the economy with a rate cut may lead instantly to higher inflation. Where experts were confidently predicting 3 US interest rate cuts this year, the odds are now favouring one or two and I would imagine these are most likely to happen around election time.
The same could be said for the UK. Inflation fell for February to 3.4% year on year. The Bank of England kept interest rates at 5.25%. But there is optimism from the governor that things are moving in the right direction and a cut is on the cards.
To this week and the major event is US PCE numbers for February on Friday, with the year on year figures expected at 2.8% for core and 2.4% for the PCE index. Fed Chair Powell will speak shortly afterwards. Prior to that we have US Durable Goods and Consumer Confidence on Tuesday. Consensus is for a rise in durable good sales by 1% for February and for Consumer confidence to remain stable at 106.7 for March.
Thursday sees final yearly GDP data from the UK and US with the UK likely to have fallen into recession (expect -0.2% for the year) and the US posting an annual figure of +3.2%.
At the moment it remains a dollar story for me. The carry trade is still valid versus the yen. The British pound looks vulnerable. All eyes stay focused on the US.
Good Luck and Good trading!
Ben Robson is Head of Institutional E-FX at Swiss Finance Corporation. He is also the Amazon Best Selling Author of Currency Kings – How Billion traders Made their Fortune Trading Forex. McGraw Hill 2017
