This Week: Inflation vs. banking fears conundrum to sway USD Index

With the big central bank meetings out of the way, this week brings with it the latest CPI data from the eurozone and focus on the Fed’s favoured inflation measure.

Here are the scheduled economic data and events that could move markets this week:

Monday, March 27

• CNH: China February industrial profits
• EUR: Germany March IFO business climate
• GBP: BOE Governor Andrew Bailey speech

Tuesday, March 28

• AUD: Australia February retail sales
• USD: US Senate hearings on Silicon Valley Bank begins; US March consumer confidence

Wednesday, March 29

• AUD: Australia February CPI
• Crude: Weekly EIA Crude Oil Inventories
• WSt30_m: House panel on recent US bank failures

Thursday, March 30

• EUR: Germany March CPI; Eurozone March economic and consumer confidence
• USD: US weekly jobless claims; US 4Q GDP (third estimate); speeches by Boston Fed President Susan Collins and Richmond Fed President Thomas Barkin

Friday, March 31

• JPY: Japan February unemployment, retail sales, industrial production; March Tokyo CPI
• CNH: China March PMIs
• EUR: Eurozone February unemployment and March inflation; Germany March unemployment
• GBP: UK GDP (final)
• USD: US February PCE Deflator, personal income and spending; New York Fed President John Williams speech

 

In light of continued data dependence by policymakers, a picture of strong underlying price pressures won’t be good news. That is because they are still also dealing with financial stability issues and developments in the banking sector will continue to set the tone for markets in the near term.

Until last month, the main drivers of markets had been energy prices and central bank monetary policy. But this has now been superseded by credit conditions and lending standards. The health of company and bank balance sheets are the focus for investors with rumours were swirling around Deutsche Bank late last week causing markets to turn risk-off.

This means safe havens have been in favour like the yen and gold while risky assets have been shunned.

 

The prospects of a US hard landing have increased as higher borrowing costs and reduced access to credit will depress economic activity. It will also help inflation move lower and more quickly than it otherwise would have done.

This does mean US rate cuts could come quicker too.

Markets have priced the first one in July with around 1% of policy easing now forecast by the end of the year. This is a huge turn-around from just weeks ago when some investors were eyeing a peak US rate of 6%!

For the USD, volatility is expected to continue with the buck only getting some love if the crisis turns much darker. Investors will then turn to safety rapidly and hunt for dollars.

In the meantime, worries have shifted over to the European banking sector after the Credit Suisse deal fuelled a steadier improvement in investor sentiment in Europe. That had seen those currencies outperform until last Friday.

Much will depend on the news flow this week around the two sectors either side of the Atlantic and whether that can carry on and the greenback slides further.

If so, initial support for the USD Index should arrive at last week’s cycle low at 101.905.

However, should fears surrounding further US banking turmoil subside, that could see this USD Index punch above its 50-day simple moving average (SMA), which is now working as the initial resistance level, and move closer towards its 100-day SMA.