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EURUSD ready for more upside? FOMC and BoJ on tap Wednesday.
John J. Hardy
Global Head of Macro Strategy
Résumé: The consolidation in EURUSD has been quite shallow, suggesting it may be ready to continue its rally sooner rather than later. Five central bank meetings this week for the G10 currencies, starting with the BoJ and FOMC on Wednesday.
We start the week with choppy moves as JPY crosses closed strongly on Friday and followed through to test key resistance in USDJPY (149.00+) and EURJPY (162.00). As we discuss below, EURUSD looks ready for more upside after a tight consolidation, with tomorrow’s Bundestag vote on the huge spending package proposed by coming chancellor Friedrich Merz. Elsewhere, the standout in positive momentum terms is the Norwegian krone, with EURNOK testing critical psychological support at 11.50 and possibly read for a further repricing lower. Below we have a look at EURUSD and the event risks for the week ahead, including five central bank meetings. Of those, the Bank of Japan has the most impact potential, while the Fed is stuck with the task of generating a set of projections on the economy and its own policy which will likely be a source of future derision. The Fed would do well to drop this now anachronistic relic of the post GFC years. The Bank of England, Sweden’s Riksbank and Swiss National bank all meet on Thursday.
Chart: EURUSD
The consolidation in the EURUSD rally has proven very shallow relative to the magnitude of the rally thus far, suggesting the upside may be ready to quickly resume. The first area of interest will inevitably be the 1.1200+ double top area from late 2024, with another line of resistance at the 2023 high of 1.1276, but the policy divergence here is quite profound and durable, as the US moves into fiscal retrenchment mode to the degree it is able (USD negative), while Germany is set for a profound fiscal expansion, with other EU member states on board with the need to vastly increase defense spending, possibly funded in part with bonds issued by the EU (EUR positive). That suggests this rally could quite easily work into the 1.1500+ area before finding more meaningful resistance. One critical question for the ability of the pair to continue its move higher is the one of trade war risks between the EU and the US, with the early April time frame important as Trump has vowed to impose tariffs on European goods starting April 2.
The week ahead – top highlights only.
Today
US Feb. Retail Sales. Many US consumers are under pressure, with record delinquent car loans and high credit card debt. When does this show up more consistently in the broader data? Also, some interesting companies reporting this week that are involved in the most discretionary of spending categories, like furniture (Williams Sonoma reporting Wednesday), athletic clothing and equipment (Nike – reporting Thursday), casual dining (Darden Restaurants, reporting Thursday) and cruises (Carnival Cruise reporting Friday).
Tuesday
Germany Bundestag vote on the EUR 500 billion infrastructure fund and deficit-driven defense spending. This is only going to a vote because a positive outcome is guaranteed – but it is an important formality to have behind us.
Germany March ZEW Survey – interesting to see how the prospects for fiscal are jolting the Expectations portion of this monthly survey. Expected to soar to 48.3 vs. 26.0 in F
be.
Wednesday
Bank of Japan – the Bank of Japan ought to hike rates this week, but no one sees them doing so in anticipation that they would like to have a look at a fuller set of the spring wage negotiations before hiking in perhaps June or later. If Japan is serious about getting the JPY level higher versus the US dollar, which I am convinced they are, some more hawkish forward guidance from the BoJ wouldn’t hurt.
FOMC. The FOMC is finding itself firmly wedged between the proverbial rock of a weakening economy and the hard place of soaring inflation expectations, if we are to believe Friday’s stunning set of University of Michigan sentiment survey data, which included a massive collapse in the Expectations part of the survey and long-term inflation expectations soaring to 3.9%, their highest since 1993. Some of this is inevitably just partisan handwringing, but perhaps as well the policy blitz from the Trump administration and what it might mean. The market is fairly pricing for the Fed to do nothing this week, but sees the economy rolling over sufficiently to prompt two-plus rate cuts by December, starting most likely in June. We’ll need realized inflation levels to calm down further to get that eventuality. The Fed will have a hard time guiding anything but wait-and-see, expressing concern on high inflation and hope, but poor visibility on the economy.
Thursday
Switzerland SNB meeting. Before the German seismic shift on its fiscal posture, the market had priced the SNB to take its policy rate all the way back to zero and possibly into negative territory, but the outlook for a massive fiscal expansion in Europe and, also important, EURCHF lifting well above 0.9500 has likely changed the mindset at the SNB, such that the market is not fully pricing a rate cut at this meeting (the rate currently 0.50%). Even if we do get the likely rate cut, the SNB is seen signaling a shift to neutral.
Sweden’s Riksbank meeting. This one is easy: the Riksbank is done with its easing cycle, so if Thedeen and company confirm the markets flat forward outlook, this will not prove a catalyst for SEK.
Bank of England. The BoE has the luxury of no expectations for a move at this meeting, with two quarter-point cuts priced for the balance of this year. Starmer’s government is taking a sharp turn to the right to get the UK’s budget reined in, reducing spending in core social welfare categories like the NHS and the dole itself with surprising determination, which will weigh on growth, but inflation would need to fall far more for the Bank of England to wax dovish relative to forward expectations.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
The Swedish krone still managing to post the strongest overall trending reading, but NOK is charging hard and has built momentum over the last week – see more on EURNOK below. CAD may continue to look like a fellow traveler with USD direction unless oil prices rally strongly.
Table: NEW FX Board Trend Scoreboard for individual pairs.
EURNOK is only three days into its new down-trend, but has been challenging key range support at 11.52 today, trading 11.50 at one point – an important area to break if something bigger is developing. Silver in USD terms has been up posting local highs, eyeing the post-pandemic high of 34.90.
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