Has the Market Gone Crazy?

What happened in the market after the US Federal Reserve meeting can be called “the theater of the absurd”. As expected, the regulator raised the key interest rate from 0.25% to 0.5% on Wednesday, March 16, for the first time since 2018. As expected, the dollar began to strengthen after that. But what no one expected was that the strengthening will last only about an hour and will amount to some 50 points. After that, it will be not the American, but the European currency that will begin to grow. As a result, the EUR/USD pair will fix a weekly high at 1.1137 the next day. 

Everything that happened was completely contrary to logic. The forecasts for US GDP were revised. And they showed that the Fed expects economic growth to slow down in 2022 from 4% to 2.8% due to the sanctions war with Russia. In addition, the forecasts for the interest rate have also changed. It was earlier said that it will reach 0.75-1.00% by the end of the year. This figure has now risen to 1.75-2.00%. Given that there are only six meetings left this year, it turns out that the FOMC (Federal Open Market Committee) will have to raise the rate by 0.25% at each of them. 

But this is not all either. The forecast for the end of 2023 was also raised from 1.50-1.75% to 2.75-3.00%. Moreover, it seems that we will face several more acts of monetary restriction in 2024. That is, this is not just a revision of forecasts, but a sharp tightening of the US monetary policy, which could deal a serious blow to the labor market and lead to a large-scale recession. 

In such a situation, the dollar would have to grow steadily, and the S&P500, Dow Jones and Nasdaq stock indices would fall drastically. But everything went the opposite way: the DXY Dollar Index fell drastically, and stock indices quickly flew up. 

As already mentioned, there is no logical explanation for this. Some believe that the reason for this is the rate increase not by 0.5%, but only by 0.25%. According to another version, the reason is that the regulator has not clarified plans to reduce the Fed’s balance sheet. And someone thinks that it is the greed factor that worked. Speculators remembered how quickly stock indices recovered after the shock at the beginning of the pandemic and decided that something similar would happen again soon. So now is the time to buy US stocks while they are still relatively cheap after a 10-week drop.

EUR/USD: the forces are approximately equal 

Logic began to return to the markets at the very end of the working week. The dollar began to rise again, and the EUR/USD turned south, finishing at 1.1050. As for its future, experts’ opinions are divided as follows: 45% have supported the growth of the pair, 35% support the fall, and 20% have taken a neutral position. Among the oscillators on D1, the picture is mixed: 30% of them are colored red, 30% are green and the remaining 40% are neutral gray. The trend indicators have an advantage on the side of the red ones: those are 65% against 35% of the green ones. 

The nearest target for the bears will be to break through support at 1.1000, then 1.0900. If successful, we can expect a retest of the March 07 low at 1.0805. This will be followed by the 2020 low of 1.0635 and the 2016 low of 1.0325. The strategic goal is parity at the level of 1.0000. 

The bulls’ immediate goal is to break through the resistance zone in the 1.1100-1.1135 area. Then there are zones 1.1280-1.1390 and the highs of January 13 and February 10 at 1.1485. 

As for the upcoming week, there are few important macro data expected. Thursday, March 24, can be singled out in the economic calendar, when data on business activity in Germany and the Eurozone will arrive. The volume of orders for capital goods and durable goods in the US will be known on this day as well.

GBP/USD: Bank of England Is One Step Ahead of the Fed 

Strange market reaction to the Fed meeting helped the pound as well. Positive statistics on the national labor market also sided with the British currency. The unemployment rate, with the forecast of 4.0%, actually fell from 4.1% to 3.9% in January, and the number of applications for unemployment benefits in February decreased by 48.1K (31.9K in the previous month). The average wage increased from 3.7% to 3.8%. Taking into account bonus payments, its growth amounted to 4.8%, which is also better than the forecast of 4.6%. All this allowed the Bank of England to once again be one step ahead of the US Federal Reserve and to raise the interest rate from 0.50% to 0.75% at its meeting on Thursday, March 17. 

It is highly likely that the regulator of the United Kingdom will continue to tighten monetary policy and raise the refinancing rate again at its next meeting, in a month and a half. The new inflation forecast will also push it to this. Unlike its US and European counterparts, the Bank of England expects it to reach 7.25% in April. It will take at least two years to bring it down to the target level of 2.0% in such a situation. 

The results of the meeting of the Bank of England initially caused the same paradoxical reaction of investors as in the case of the US Federal Reserve. The GBP/USD pair, instead of growing, fell from 1.3210 to 1.3087 on expectations of an active rate hike. However, then, as in the case of the euro, the market changed its mind, and the pair completed the five-day period at 1.3175. 

Experts’ forecast for the GBP/USD pair for the next week is as follows: 50% vote for the movement to the north, 40% are for further movement to the south, the remaining 10% vote for the sideways trend. Among the oscillators on D1, 70% are looking down, 30% have taken a neutral position at the time of writing the review. For trend indicators, 65% side with the bears, 35% side with the bulls. 

The nearest support is located in the zone 1.3080-1.3100, then comes the low of the past week (and at the same time of 2021-2022) – 1.3000, followed by the 2020 support. Resistance levels are 1.3185-1.3210, then 1.3270-1.3325, 1.3400, 1.3485, 1.3600, 1.3640.

 As for the events of the upcoming week, one can pay attention to the data from the UK consumer market, which will arrive on Wednesday March 23. The country’s services PMI (Markit) will be released on the next day, Thursday, March 24, which is expected to rise from 60.5 to 60.7 over the month.

USD/JPY: Yen Falls to Six-Year Low

The headline of the previous USD/JPY review stated that “the markets chose the dollar”. The past week has only confirmed this conclusion. Despite the fact that the US currency fell against the euro and the pound, it continued to grow steadily against the yen. The high of the week was fixed at 119.40, while the finish was slightly lower­, at the level of 119.15. The last time the USD/JPY pair traded so high was a very, very long time ago, at the turn of 2016/2017. 

The reason for this is the Bank of Japan, which does not want to change its ultra-soft monetary policy. The position of the Japanese regulator differs sharply from the position of the Fed, the Bank of England, and even the ECB. Although, admittedly, there are certain reasons for this. Inflation in the country amounted to only 0.9% in February in annual terms against 0.5% in January. This indicator, although it was the highest since April 2019, is simply insignificant compared to the inflation rate in the UK or in the US, where it reached 7.9%, the highest in the last 39 years.

And although, following the results of the last meeting on Friday, March 18, the Central Bank of Japan announced that it expected inflationary pressure to increase due to rising energy and commodity prices, it still kept the interest rate at a negative level, minus 0.1%, and the target yield of ten-year government bonds are close to zero.

As for the forecast, 70% of analysts believe that it is time for the pair to turn down, 20% hold the opposite view, and 10% have just shrugged. Among the indicators on D1, there is almost complete unanimity after such a powerful breakthrough to the north. 100% of trend indicators and oscillators are looking up, although 35% of the oscillators are already in the overbought zone. 

The pair easily broke through all the resistance levels indicated a week ago, and one can most likely focus on the next round values with a backlash of plus/minus 15-20 points now. The nearest zone is 119.80-120.20. Supports are located at the levels and in the zones 119.00, 118.00-118.35, 117.70, 116.75, 115.80-116.15.

Of the week’s macro statistics, inflation data in Tokyo, which will be released on Friday, March 25, is of interest. According to forecasts, the core consumer price index in the country’s capital may fall from 0.5% to 0.4%. A report on the latest meeting of the Japanese regulator’s Monetary Policy Committee will be published a day earlier. However, all its main decisions are already known, so one should hardly expect any surprises from this document.