EURUSD surged despite a less hawkish ECB hold; Gold, Dow jumped

On Thursday (7th March), some focus of the market was on the ECB’s monetary policy decision. As unanimously expected, on Thursday ECB held all key policy rates; i.e. reference interest rates on the main refinancing operations (MRO-interbank rate) at +4.50%; interest rates on the marginal lending facility (MLF-repo rate) at +4.75%, and interest rate on deposit facility (DRF-reverse repo) at +4.00%, all are at 22-years high (since Oct’2008) after 10th consecutive rate hikes till Sep’23 (cumulating +450 bps since July’22).

The ECB maintained its interest rates at historically high levels during its March meeting, as policymakers balanced concerns over a looming recession with persistently elevated underlying inflationary pressures. But the ECB has projected headline HICP inflation to average 2.3% in 2024 (compared to 2.7% in December projections), 2.0% in 2025 (compared to 2.1%), and 1.9% in 2026. The core HICP inflation rate is expected at 2.6% in 2024 (compared to an earlier projection of 2.7%), 2.1% in 2025 (compared to 2.3%), and 2.0% in 2026 (compared to 2.1%). The ECB has also revised its growth projection for 2024 downward to 0.6%, anticipating continued subdued economic activity shortly. However, they foresee a subsequent uptick in growth, with the economy expected to expand by 1.5% in 2025 and 1.6% in 2026. Overall, the ECB projected lower average core inflation for 2025, which was seen as less hawkish.

The ECB kept all policy rates unchanged at record-high levels during its 2nd meeting of 2024 and pledged to maintain them at sufficiently restrictive levels for as long as necessary to bring inflation back to its 2% target in the medium term, despite concerns about a looming recession. The main refinancing operations rate (MRO) remained at a 22-year high of 4.5% for a third consecutive time, while the deposit facility rate (DRF) held steady at a record of 4%. The ECB maintained interest rates at multi-year highs for the third consecutive meeting and signaled an early conclusion to its last remaining bond purchase scheme under PEPP. The ECB reiterated full reinvestment under the PEPP (backdoor QE) will end on 30th June and subsequent QT of the PEPP portfolio by €7.5B/Month till Dec’24.

Although officially ECB refrained from any forward guidance for rate cuts, in her presser/Q&A, ECB President Lagarde said ECB officials/GC members are now discussing possible rate cuts (roll back of restrained policy/stance) on a preliminary basis and may focus on cumulative economic data (inflation, employment and GDP/economic activities) in June; i.e. for H1CY24 data. Accordingly, if core inflation indeed eased well below 3% and the outlook of the same matches with ECB projections, then the ECB may go for rate cuts of 75-100 bps in H2CY24 (in line with Fed). Thus overall, the ECB opted for a less hawkish hold despite Lagarde saying detailed ECB GC discussions about rate cuts at this stage are still premature. ECB GC started preliminary discussions about a rate cut plan in the future.

ECB MRO-INTERBANK RATE AT +4.50% (Ref. policy rate)

On 25th January, during the last post-policy meeting presser/Q&A, ECB President Lagarde said policymakers/Governing Council (GC) did not discuss any rate cuts as it would be ‘speculative & premature’ at this stage, reiterating that future decisions would be data-dependent (not Fed-dependent). On 7th March, Lagarde refrained from using the term as ‘speculative’, but kept the ‘premature’ stance, although acknowledged the start of preliminary discussions about rate cuts in the coming months. The market is now pricing around a 100-75 bps rate cut by the ECB in 2024 (in line with Fed), unchanged before the ECB.

Overall, like the Fed, the ECB also indicated they are at the peak of the terminal rate, which is now at a restrictive zone and has to maintain for sufficient time so that inflation will gradually fall to +2.0% targets. But unlike the Fed, the ECB denied any official discussion about any rate cuts at this point, terming it as premature, although Lagarde acknowledged initial discussions of the same by ECB GC members.

Thus overall, it may be termed as a synchronized hawkish hold (higher for longer); the same stance is being taken by all other major G4 central banks like the Fed, BOE, and BOC to ensure tighter financial conditions, higher borrowing costs and lower inflation expectations/lower demand/return to price stability without causing a hard landing; i.e. tighter financial conditions/higher borrowing costs are creating an economic slack, affecting demand so that it could balance with the present constrained supply capacity of the economy, helping inflation down.

Full Text of ECB statement: Monetary policy decisions: 7th March’2024

The Governing Council today decided to keep the three key ECB interest rates unchanged. Since the last Governing Council meeting in January, inflation has declined further. In the latest ECB staff projections, inflation has been revised down, in particular for 2024 which mainly reflects a lower contribution from energy prices. Staff now project inflation to average 2.3% in 2024, 2.0% in 2025, and 1.9% in 2026. The projections for inflation excluding energy and food have also been revised down and average 2.6% for 2024, 2.1% for 2025 and 2.0% for 2026. Although most measures of underlying inflation have eased further, domestic price pressures remain high, in part owing to strong growth in wages.

Financing conditions are restrictive and the past interest rate increases continue to weigh on demand, which is helping push down inflation. Staff have revised their growth projection for 2024 to 0.6%, with economic activity expected to remain subdued in the near term. Thereafter, staff expects the economy to pick up and grow at 1.5% in 2025 and 1.6% in 2026, supported initially by consumption and later also by investment.

The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. Based on its current assessment, the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. The Governing Council’s future decisions will ensure that policy rates will be set at sufficiently restrictive levels for as long as necessary.

The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. In particular, the Governing Council’s interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.

Key ECB interest rates

The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 4.50%, 4.75% and 4.00% respectively.

Asset purchase programme (APP) and pandemic emergency purchase programme (PEPP)

The APP portfolio is declining at a measured and predictable pace, as the Eurosystem no longer reinvests the principal payments from maturing securities.

The Governing Council intends to continue to reinvest, in full, the principal payments from maturing securities purchased under the PEPP during the first half of 2024. Over the second half of the year, it intends to reduce the PEPP portfolio by €7.5 billion per month on average. The Governing Council intends to discontinue reinvestments under the PEPP at the end of 2024.

The Governing Council will continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to countering risks to the monetary policy transmission mechanism related to the pandemic.

Refinancing operations

As banks are repaying the amounts borrowed under the targeted longer-term refinancing operations, the Governing Council will regularly assess how targeted lending operations and their ongoing repayment are contributing to its monetary policy stance.

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The Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation returns to its 2% target over the medium term and to preserve the smooth functioning of monetary policy transmission. Moreover, the Transmission Protection Instrument is available to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across all euro area countries, thus allowing the Governing Council to more effectively deliver on its price stability mandate.

Text of the opening statement by ECB President Lagarde: 7th March’24

The Governing Council today decided to keep the three key ECB interest rates unchanged. Since our last meeting in January, inflation has declined further. In the latest ECB staff projections, inflation has been revised down, in particular for 2024 which mainly reflects a lower contribution from energy prices. Staff now project inflation to average 2.3 percent in 2024, 2.0 percent in 2025 and 1.9 percent in 2026. The projections for inflation excluding energy and food have also been revised down and average 2.6 percent for 2024, 2.1 percent for 2025 and 2.0 percent for 2026. Although most measures of underlying inflation have eased further, domestic price pressures remain high, in part owing to strong growth in wages.

Financing conditions are restrictive and our past interest rate increases continue to weigh on demand, which is helping push down inflation. Staff have revised their growth projection for 2024 to 0.6 percent, with economic activity expected to remain subdued in the near term. Thereafter, staff expects the economy to pick up and to grow at 1.5 percent in 2025 and 1.6 percent in 2026, supported initially by consumption and later also by investment.

We are determined to ensure that inflation returns to our two per cent medium-term target in a timely manner. Based on our current assessment, we consider that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. Our future decisions will ensure that our policy rates will be set at sufficiently restrictive levels for as long as necessary.

We will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. In particular, our interest rate decisions will be based on our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.

The decisions taken today are set out in a press release available on our website.

I will now outline in more detail how we see the economy and inflation developing and will then explain our assessment of financial and monetary conditions.

Economic activity

The economy remains weak. Consumers continued to hold back on their spending, investment moderated and companies exported less, reflecting a slowdown in external demand and some losses in competitiveness. However, surveys point to a gradual recovery for this year. As inflation falls and wages continue to grow, real incomes will rebound, supporting growth. In addition, the dampening impact of past interest rate increases will gradually fade and demand for euro-area exports should pick up.

The unemployment rate is at its lowest since the start of the euro. Employment grew by 0.3 percent in the final quarter of 2023, again outpacing economic activity. As a result, output per person declined further. Meanwhile, employers are posting fewer job vacancies, while fewer firms are reporting that their production is being limited by labor shortages.

Governments should continue to roll back energy-related support measures to allow the disinflation process to proceed sustainably. Fiscal and structural policies should be strengthened to make our economy more productive and competitive, expand supply capacity, and gradually bring down high public debt ratios.

A speedier implementation of the Next Generation EU programme and more determined efforts to remove national barriers to deeper and more integrated banking and capital markets can help increase investment in the green and digital transitions and reduce price pressures in the medium term. The EU’s revised economic governance framework should be implemented without delay.

Inflation

Inflation edged down to 2.8 percent in January and, according to Eurostat’s flash estimate, declined further to 2.6 percent in February. Food price inflation fell again, to 5.6 percent in January and 4.0 percent in February, while energy prices in both months continued to decline compared with a year ago but at a lower rate than in December. Goods price inflation also fell further, to 2.0 percent in January and 1.6 percent in February. Services inflation, after remaining at 4.0 percent for three months in a row, edged lower to 3.9 percent in February.

Most measures of underlying inflation declined further in January as the impact of past supply shocks continued to fade and tight monetary policy weighed on demand. However, domestic price pressures are still elevated, in part owing to robust wage growth and falling labor productivity. At the same time, there are signs that growth in wages is starting to moderate. In addition, profits are absorbing part of the rising labor costs, which reduces the inflationary effects.

Inflation is expected to continue this downward trend in the coming months. Further ahead, it is expected to decline to our target as labor costs moderate and the effects of past energy shocks, supply bottlenecks and the reopening of the economy after the pandemic fade. Measures of longer-term inflation expectations remain broadly stable, with most standing around 2 percent.

Risk assessment

The risks to economic growth remain tilted to the downside. Growth could be lower if the effects of monetary policy turn out stronger than expected. A weaker world economy or a further slowdown in global trade would also weigh on euro area growth. Russia’s unjustified war against Ukraine and the tragic conflict in the Middle East are major sources of geopolitical risk. This may result in firms and households becoming less confident about the future and global trade being disrupted.

Growth could be higher if inflation comes down more quickly than expected and rising real incomes mean that spending increases by more than anticipated, or if the world economy grows more strongly than expected.

Upside risks to inflation include heightened geopolitical tensions, especially in the Middle East, which could push energy prices and freight costs higher in the near term and disrupt global trade. Inflation could also turn out higher than anticipated if wages increase by more than expected or profit margins prove more resilient. By contrast, inflation may surprise on the downside if monetary policy dampens demand more than expected, or if the economic environment in the rest of the world worsens unexpectedly.

Financial and monetary conditions

Market interest rates have risen since our January meeting and our monetary policy has kept broader financing conditions restrictive. Lending rates on business loans have broadly stabilized, while mortgage rates declined in December and January. Nevertheless, lending rates remain elevated, at 5.2 percent for business loans and 3.9 percent for mortgages.

Bank lending to firms had turned positive in December, growing at an annual rate of 0.5 percent. But, in January, it edged lower, to 0.2 percent, owing to a negative flow in the month. The growth in loans to households continued to weaken, falling to 0.3 percent on an annual basis in January. Broad money – as measured by M3 – grew at a subdued rate of 0.1 percent.

Conclusion

The Governing Council today decided to keep the three key ECB interest rates unchanged. We are determined to ensure that inflation returns to our two per cent medium-term target in a timely manner. Based on our current assessment, we consider that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. Our future decisions will ensure that our policy rates will be set at sufficiently restrictive levels for as long as necessary. We will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.

In any case, we stand ready to adjust all of our instruments within our mandate to ensure that inflation returns to our medium-term target and to preserve the smooth functioning of monetary policy transmission.

We are now ready to answer your questions.

Highlights of ECB President Lagarde’s comments during Q&A (Presser): 7th March’24

·         ECB Deposit Rate Actual 4% (Forecast 4%, Previous 4.00%)

·         In particular, the ECB’s interest rate decisions will be based on its assessment of the inflation outlook in light of incoming economic and financial data, dynamics of underlying inflation and strength of monetary policy transmission

·         Financing conditions are restrictive and past interest rate increases continue to weigh on demand, which is helping push down inflation

·         Staff have revised their growth projection for 2024 to 0.6%, with economic activity expected to remain subdued in the near term

·         Staff expect the economy to pick up and to grow at 1.5% in 2025 and 1.6% in 2026, supported initially by consumption and later also by investment

·         ECB will continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to countering risks to monetary policy transmission mechanism related to the pandemic

·         ECB will continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to countering risks to monetary policy transmission mechanism related to the pandemic

·         Over the second half of the year, we intend to reduce the PEPP portfolio by €7.5 billion per month on average

·         The ECB intends to continue to reinvest, in full, principal payments from maturing securities purchased under PEPP during the first half of 2024

·         Projections for inflation excluding energy and food have also been revised down and average 2.6% for 2024, 2.1% for 2025, and 2.0%, for 2026

·         ECB’s new inflation projections: 2.3% in 2024, 2.0% in 2025 and 1.9% in 2026

·         Staff have revised their growth projection for 2024 to 0.6%, with economic activity expected to remain subdued in the near term

·         ECB's new core inflation projections: 2.6% for 2024, 2.1% for 2025 and 2.0% for 2026

·         Staff expect the economy to pick up and to grow at 1.5% in 2025 and 1.6% in 2026, supported initially by consumption and later also by investment

·         The economy remains weak

·         Consumers are holding back on spending

·         Real incomes will rebound, supporting growth

·         Surveys point to a gradual recovery for the year

·         Demand for Euro-Area exports should pick up

·         Employers are posting fewer job vacancies

·         Demand for labor is slowing

·         Domestic price pressures are elevated

·         There are signs growth in wages is starting to moderate

·         Inflation is to decline to the target

·         Inflation is seen continuing the downward trend

·         Longer-term inflation expectations mostly stand around 2%

·         Risks to economic growth remain tilted to the downside

·         Geopolitical tensions are among the upside risks to inflation

·         The economy remains weak but surveys point to a pick-up this year

·         The governing council agreed on a new statement on the capital market union, to be published today

·         We're making progress in the disinflationary process

·         We are making good progress toward the inflation target

·         We are not sufficiently confident about inflation

·         Data will come in the next few months, we will know a lot more in June

·         We'll know a little more in April and a lot more in June

·         We're seeing general moderation in underlying inflation

·         It's a positive signal but there is not enough yet

·         The data is directionally good but not strong or durable enough

·         The ECB decision was unanimous

·         The only underlying indicator that isn't declining is domestic inflation

·         I expect 4Q wage data tomorrow to show a slowdown

·         We will not wait until we are at 2%

·         Market expectations seem to be converging better

·         My strong expectation is that it will be completed on March 13th

·         We discussed the framework yesterday to arrive at a consensus

·         We are more confident about inflation but not sufficiently confident

·         We're still in the holding season, we'll move to the restrictiveness season and then normalization

·         I won't commit to the pace of future rate moves

·         We have not discussed rate cuts at this meeting

·         We have begun discussing dialing back our restrictive stance

·         It matters that we have more data in June

·         The ECB will act independently of what the Fed does, although having great focus on the Fed, being the most systematically important Central Bank in the world

·         I didn't say there was no rush

ECB's VP de Guindos said:

·         Commercial real estate is one of the main risks in the region

·         Exposure of European banks to commercial real estate is quite limited

·         The problem is that some banks have higher exposure and concentration

·         We have not seen any widespread contagion linked to CRE

·         The exposure of non-banks is much larger

Conclusions:

In Feb’24, the annual core EZ CPI fell to +3.1% from +3.3% in Jan’24 and an average +4.95% in 2023.

Looking at the previous sequential run rate trend, the average core CPI in 2024 should be around +2.7%, while it may reach around +2.2% by Dec’25, in line with ECB projections. For this to happen, the average sequential core CPI would have to fall from present +0.3% to +0.2% in 2024 and +0.15% in 2025. Thus there is a need to maintain a real positive rate, restrictive enough to bring inflation back to +2.0% targets by early 2026 or at least by Dec’25 on average

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Europe/EU is the real victim of the Russia-Ukraine and Israel-Hamas war as it’s an import-oriented economy for both fuel and food; i.e. imported inflation is the main issue here amid weaker EURUSD. Euro Area economy may be now in a stagflation-like situation (lower/negative economic growth and higher inflation). Apart from supply chain disruptions, Eurozone core inflation was also boosted by wage growth, pent-up demand, especially for services, and increasing pricing power of producers. EU is the biggest loser of the lingering Russia-Ukraine/NATO war/proxy war as it’s a net importer of both food and fuel coupled with other commodities and a weaker EUR.

As per Taylor’s rule, for the Eurozone:

Recommended policy repo rate (I) = A+B+(C+D)*(E-B) =0.00+2.00+ (0+0)*(5.0-2.00) =0+2+3.0=5.0%

Here for EU /ECB

A=desired real interest rate=0.00; B= inflation target =2.00; C= permissible factor from deviation of inflation target=0; D= permissible factor from deviation of output target from potential=0.00; E= Estimated average core inflation=5.0% (for 2023~4.95%)

The repo rate of the ECB is now at +4.75% against Taylor’s rule suggestion of +5.0%. Growing real policy divergence between the Fed and ECB along with a stagflation-like scenario in the EU may keep EURUSD lower in the coming days, causing more imported inflation as the EU depends on both fuel and food imports.

On Thursday, Fed’s Bowman said:

·         January inflation data suggests progress in lowering inflation further may be slower going forward

·         The latest employment data shows a continued tight job market

·         Given the frequency of data revisions, we will remain cautious in our approach to considering any policy stance change

·         The baseline is for a continued decline in inflation, but I see a number of upside inflation risks to my outlook

·         The current policy stance is restrictive, appears appropriately calibrated to reduce inflation

·         I remain willing to raise the policy rate if data shows progress on inflation has stalled or reversed

·         Should incoming data show inflation moving sustainably to the 2% target; it will eventually become appropriate to gradually lower the policy rate; In my view, we are not yet at that point

·         Red Sea disruptions benefit shipping companies' near-term profitability

On Thursday, Fed’s Chair Powell said in his 2nd day of Congressional testimony (US Senate):

·         When rates are normalized, the underlying housing shortage will still put upward pressure on prices

·         If the economy does as expected think carefully about cutting rates to begin this year

·         The quantity of homes available for sale is incredibly low

·         We should see the housing market start to heal as rates and inflation come down but it won't fix long-term problem

·         The housing market is in a very difficult situation

·         Insurance of different kinds has been a significant source of inflation recently

·         The US economy is growing at a healthy, sustainable, solid pace

·         Inflation was too high

·         The labor market is strong, but sand is still quite tight

·         As the labor market cools, we have seen and will see food inflation flattening

·         We are nowhere near recommending or adopting a central bank digital currency in any form

·         I expect there to be bank failures from CRE. But not big banks, there are more small and medium-sized banks with the biggest exposure; CRE has secular change after COVID amid a higher trend of WFH

·         I think we're in the right place with policy

·         I am waiting to be more confident about disinflation, we are not far from it

·         I could see a case for shortening the maturity of Fed holdings (B/S) in the coming years (gradually)

·         FOMC will discuss QT/BS details in the March meeting

·         If the economy meets forecasts, rate cuts are likely later this year; it would be sooner rather than later to avoid any recession (hard landing)

·         Fed had made a mistake by allowing inflation ‘modestly’ above 2% for some time after COVID, assuming it was ‘transitory’ under the then policy of flexible inflation targeting (say 2% inflation average target over 5 years)

·         Fed has realized the mistake and soon goes for jumbo rate hikes since early 2021

·         Fed will continue to manage B/S effectively despite continuing issuance of fresh debts (treasuries) by the government

·         Fed will ensure to keep the grand status of USD as the global reserve currency in the days ahead (irrespective of 24/7 printing/rate cuts/rate hikes/QE/QT etc)

·         Nervous-looking Powell fumbled Senator Warren’s attack for defending his present stance to weaken BASEL-III regulatory capital norms amid extensive lobbying by big banks

·         Powell wants to modify weaker/less tougher BASEL-III norms, while Warren seeks the opposite (tougher BASEL-III norms already proposed by Brar, but Powell & Co is trying to delay/modify it)

·         Despite ballooning public debt cost/interest servicing as a result of higher inflation/higher rates/higher borrowing costs/higher issuance of debts/treasuries, Powell/Fed is confident that US/Treasury will never default on debt (like any other poor 3rd world country/EME)

·         But the US needs fiscal sustainability policy on a long-term and bipartisan basis to be agreed upon by both sides of the political spectrum (Democrats-Republicans)

·         Fed is exploring a new tool for liquidity enhancements in the coming days along with complete digitalization of the REPO facility (discount window, from where a bank can take funds from the Fed urgently and even anonymously without any stigma)

·         Fed will ensure that bank depositors will get a fair return on their deposits as per prevailing interest rate regime

·         The housing market is in a very challenging situation amid lower supply, and higher demand, especially after COVID amid the increasing trend of WFH; now higher borrowing costs are also affecting affordability, but restraining surging prices to some extent through curtailing demand (expensive mortgage)

·         Lower inflation/price stability will ensure a longer period of steady economic growth and expansion along with inclusive employment

·         Fed’s official/legal target is headline/total CPI, but Fed considers core inflation/core CPI as an underlying trend amid volati8le food & fuel inflation; presently headline total CPI at +3.1% is less than core CPI at 3.9%; but eventually, Fed will ensure headline CPI at around 2% on a sustainable basis as per its price stability target

·         Expensive borrowing if any for BASEL-III norms will be applicable for both household and business loans (small/big)

·         Fed does not print money (USD) and lends to the government to finance never-ending fiscal/budget deficit; US Treasuries issue debts to the government, which were primarily subscribed by the American public, DIIs and FPIs/Foreign countries (primary market); eventually Fed buys most of these debts directly (under QE) or indirectly (through regular REPO operations) from the secondary market

·         Senator warned Powell about this statement (Fed does not print money to fund the deficit of the government) as part of the ‘sustainable fiscal discipline mission’

·          Powell fumbled on a Senator's question about higher corporate greedflation and shrinkflation are one of the primary reasons behind today’s elevated inflation

On Friday, Fed’s Mester said:

·         I expect growth & employment to slow this year

·         Monetary policy is currently in a good place, given the outlook

·         If the economy meets forecasts, rate cuts are likely later this year

·         I expect the Fed will be able to lower rates gradually

·         At some point, the Fed will taper ahead of stopping balance sheet cuts

·         The Fed has the luxury of holding steady while taking in more data

·         Inflation may prove more persistent this year

·         The biggest mistake would be premature Fed rate cuts

Fed may cut rates from July’24; i.e. in H2CY24 for a cumulative 75-100 bps; every major central bank including ECB, BOE, and BOC has to follow ‘King Fed/USD’, whatever may be the narrative (synchronized global rate cuts amid a synchronized easing in core inflation). In any way, as the Fed is not in a hurry to cut rates in H1CY24, expect generally hotter than expected US labor market data and gradual easing of core inflation data to suit the Fed narrative. The White House/Biden admin will also be happy going for the election supported by a strong economy, robust labor market, and cooling inflation almost at the 2% target.

Bottom Line:

ECB may cut rates from July’24; i.e. in H2CY24 for a cumulative 75-100 bps in line with Fed.

Market impact:

On Friday, at the start of the US session EURUSD, Wall Street Futures, Gold surged, while USDJPY plunged as Powell sounded less hawkish than expected in his 2nd day of Congressional testimony. Powell said the Fed is ‘not far’ from feeling confident enough about the ongoing disinflation process to cut policy rates. He stated that rate cuts "can and will begin" this year, while policymakers are well aware of the risks of cutting too late and too fast. Powell also indicated active discussions about QT in the March meeting. Also Friday NFP/BLS job data for February was mixed as unemployment shots up 3.9% from 3.7%, but NFP headline job additions were far above estimates with inline estimate pf +4.3% wage growth. The market is now almost fully discounting 1st Fed rate cut in June, but the Fed may start in July after fully assessing H1CY24 data along with the outlook thereof for H2CY24 and 2025.

Technical trading levels: EURUSD

Whatever the narrative, technically EURUSD (1.09600) now has to sustain above 1.10000-1.10600* for a further rally of 1.11500/1.11800-1.12500/1.13000* and 1/14500-1.17400 in the coming days; otherwise sustaining below 1.09800, may again fall to 1.08700/1.08300-1.07900/1.07000 in the coming days.