Weekly Market Outlook: The Reserve Bank of New Zealand is expected to raise interest rates for the third time. European PMI data and US GDP figures will also be widely watched by traders for clues on the strength of the economy. Financial markets are closely watching the geopolitical developments regarding tensions between Russia and Ukraine, which heavily weigh on global sentiment.
NZD | RBNZ Monetary Policy Statement
Recent weeks have seen the central bank’s interest rate policy dominate the news. This was also a theme of the Reserve Bank of New Zealand’s (RBNZ’s) rate statement this week. Since there have been some big currency moves based on central bank decisions in recent weeks, it’s a topic to watch this week.
On Wednesday, 23 February at 1.00 AM GMT, the Reserve Bank of New Zealand (RBNZ) will likely release its latest monetary policy statement and interest rate decision. It is widely expected that the RBNZ will increase interest rates for the third time, following increases in October and November.
As inflation hit a 30-year high of 5.9% in the last quarter, the central bank is trying to slow things down and bring the figure within its target range of 1 – 3%.
As of late January, the downtrend in the NZDUSD currency pair has been stabilized after a small relief rally. Currently, the price is trading around 0.6720.
If the RBNZ increases interest rates more than expected, there is a chance the price could break through these technical areas of resistance and attempt a push towards the next resistance around 0.6860. The current resistance levels can serve as a base for short-sellers if the central bank holds back. Price action after the news will be key to understanding who is in control.
EUR | PMIs likely improved in February
The European Central Bank was also forced to do a U-turn on the possibility of raising rates in 2022. The final Euro area CPI reading due Wednesday is expected to confirm 5.1% inflation in January.
Although the ECB is mindful of the fragile recovery in Eurozone economies, it has been relaxed about the jump in CPI prints, blaming it on a recent spike in energy prices. As more and more member states are gradually dropping Omicron’s virus curbs, the flash PMIs due on Monday may point to a rebound in economic activity.
The PMIs, however, may struggle due to falling household spending caused by rising inflation and escalating tensions with Russia, Ukraine, and countries in the West. But these are low economic risks for the moment that could become a lot more prominent in the future.
Despite diplomatic attempts by European leaders to diffuse hostilities between Russia and Ukraine, war remains a very real possibility. Gold has benefitted from the heightened tensions, as well as safe-haven currencies like the yen and Swiss franc, and to a lesser extent, the USD.
USD | Flash PMIs & PCE Report
Despite the fact that markets will be closed on Monday for Presidents’ Day, there will be no shortage of data in the US. Tuesday, though, will kick off a hectic week with the release of the flash PMIs and consumer confidence index. According to forecasts, the second estimate of fourth-quarter GDP will be revised upward to 7.0% on Thursday.
On Friday, the focus will be on the PCE report, which will give some insight into how well consumption held up in January and whether price pressures in the Fed’s preferred inflation metric remained as high as they did in the consumer price index. Higher crude oil prices are also likely to worsen already-surging inflation, compounding worries that the Fed must tighten monetary policy aggressively to reduce consumer prices.
It is also important to note that the core PCE price index is projected to have increased by an additional 0.5% m/m in January, continuing the upward trend observed in the core CPI data.
As for the upcoming data release, any positive surprises could be encouraging for the dollar, although it is expected that the Fed will raise rates by 50bps in March. Even though geopolitical concerns haven’t been helpful, an unexpectedly strong PCE inflation print could boost confidence.
Markets react strongly to Ukraine crisis
Conflicting reports on ongoing geopolitical tensions between Russia and Ukraine adversely affect the markets. The rapidly rising oil prices can have a disastrous effect on markets, as they increase business costs and consumer prices.
Markets are worried about how companies will cope with inflation reaching decades-high levels in many countries, along with questions about whether consumers will reduce spending as prices rise. According to Capital Economics, crude oil and natural gas prices would surge if the conflict in Ukraine escalated “even if they fall back relatively quickly as the dust settles.”
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