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Market Outlook

US Inflation, BOC & ECB Rate Decisions & UK GDBP

This week there’s a range of important economic events that are worth watching. Pay close attention because these events are likely to be the driving force behind price action this week.

Got something else to add? Share your thoughts in the comments below!

US Dollar

Financial markets will be busy balancing the effects of yet another major relief package, an improving labour market, and a bond market selloff that shows no signs of slowing down. Following the change in Treasuries, the dollar has been soaring, and all indications are that this trend will continue.

The COVID relief bill is nearing completion, and several states have already reopened. The pressure is on for Democrats to quickly deliver this relief bill and move swiftly onto infrastructure spending.  On Wednesday, Texas will reopen completely and remove the mask legislation, meaning that more states could follow suit. Virus variants are still a short-term threat, but they haven’t stopped many states from reopening.

The Fed is fully prepared for a temporary increase in prices, but the bond market may use it as an excuse to raise bond yields and push Fed rate hike expectations forward. The headline annual CPI reading for February is forecast to rise from 1.4% to 1.7% on Wednesday.

Euro

EU debt markets have tightened again this week, but officials’ comments suggest they are concerned about increasing government bond yields. With Jerome Powell appearing to take the opposite stance, the chances of the EUR/USD falling next week are growing. It is currently testing support at 1.1960 and is aiming for 1.1800, with 1.1600 as a secondary target.

On that note, the ECB’s recent rate decision on Thursday takes on even more significance. If the bond saga continues, European Central Bank officials can send a clear signal that the bank will speed up bond purchases if necessary to keep interest rates from rising. Long story short, the Euro is in a bad way.

British Pound

Overall, the UK budget was well received, with the corporate sector set to bear the brunt of potential tax increases. The government will hold the fiscal stimulus taps open until September in the short term. On Friday, UK GDP and Industrial Production could surprise us if it’s not as bad as expected, which would boost equities and the Pound.

The British Pounds price action has returned into its rising 6-month channel this week. As the Bank of England remains silent on increasing Gilt yields, it is outperforming the Euro. Just a break of 1.3800 by the GBP/USD indicates a deeper correction to 1.3500. The faster pace of vaccinations and a widening yield differential will keep EUR/GBP under pressure, and it may fall below 0.8500 this week.

Got something else to add? Share your thoughts in the comments below!

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