Week Ahead: All Eyes On Fed

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Includes: DRR, ERO, EUFX, EUO, FXE, UDN, ULE, URR, USDU, UUP
by: Dean Popplewell

March rate hike at 93 percent probability

The U.S. dollar is higher against most major pairs as the two-day Federal Open Market Committee (FOMC) meeting is expected to bring forth the first U.S. interest rate hike of 2017. The FOMC statement will be released on Wednesday, March 15 at 2:00 pm EDT (7:00 pm GMT) with a scheduled press conference from Fed Chair Janet Yellen starting at 2:30 pm. The U.S. central bank is forecasted to hike the benchmark rate 25 basis points at <1.00%.

Fed members were instrumental in changing market perception around the March meeting. Back in February 14, the rate hike probabilities were low, but now, according to the CME FedWatch tool, there is a 93 percent probability the rate is raised on March 15. The Fed is also realizing an update to its economic projections that could give further insight on the pace of the rate hikes anticipated for this year. The market has already priced in a rate hike on Wednesday, but a more hawkish dot-plot upping the tempo to four rate hikes could further boost the greenback.

The European Central Bank (ECB) held rates on Thursday, but the rhetoric from President Mario Draghi soothed market anxiety about risks to the end of the euro that have been rising as several elections are set to take place in 2017. A Bloomberg article about a possible discussion of the ECB Governing Council on a rate hike coming before the end of the stimulus program appreciated the EUR against the USD on Friday.

The EUR/USD gained 0.786 percent in the last week. The single currency is trading at 1.0686 after the ECB held rates steady and surprised markets with an optimistic outlook that could see it hike rates sooner than anticipated.

The ECB held rates unchanged on Thursday but did not call for further easing and President Draghi's comments on how the risks of the end of the euro are highly improvable at this stage. Political risk remains high with the French elections, the one to watch given the rhetoric from Marie Le Pen, although Emmanuel Macro's rise has reduced some anxiety as he is now in the lead according to polls to win in the second round.

Despite a strong U.S. non-farm payrolls (NFP) report on Friday, the spotlight was on comments from the European Central Bank that a possible rate hike could come before the end of the QE program at the end of the year.

Investors are looking forward at the Fed's economic projections and the words from Fed Chair Janet Yellen for more details on future rate hikes as March was put on the table by Fed member comments and more information could be forthcoming on Wednesday.

West Texas lost 8.941 percent in the last 5 days. The price of WTI is trading at $48.22 after Wednesday's report of larger than forecasted U.S. crude inventories. The Energy Information Administration reported a weekly buildup of 8.2 million barrels when only 1.1 million was expected. The ninth consecutive weekly increase is casting doubt on how effective the Organization of the Petroleum Exporting Countries' (OPEC) production cut deal can be if other producers ramp up their activity.

The OPEC deal has had little real impact on global inventories, but it managed to keep prices around $50 per barrel. The lack of demand for energy around the world and increased production from nations outside of the agreement have put downward pressure on crude prices. OPEC members could be questioning if sticking to the agreement is beneficial for them in the long term which could further drive prices down as the deal has been the main driver of price stability in the past two years.

Gold lost 2.65 percent in the last trading week. The price of the yellow metal is trading at $1,202.63 after the U.S. added 235,000 jobs in February, and if Fed members' comments are accurate, a March rate hike is in the cards. Gold has been on the back foot since Fed speakers turned up their rate hike signalling ahead of the March FOMC. The CME FedWatch tool shows a 93 percent probability of a rate hike being announced on March 15.

Market events to watch this week:

Monday, March 13

9:30 am EUR ECB President Draghi Speaks
10:00 pm CNY Industrial Production y/y

Tuesday, March 14

6:00 am EUR German ZEW Survey
8:30 am USD PPI m/m

Wednesday, March 15

8:30 am USD CPI m/m
8:30 am USD Core CPI m/m
8:30 am USD Core Retail Sales m/m
8:30 am USD Retail Sales m/m
10:30 am USD Crude Oil Inventories
2:00 pm USD FOMC Economic Projections
2:00 pm USD FOMC Statement
2:00 pm USD Federal Funds Rate
2:30 pm USD FOMC Press Conference
5:45 pm NZD GDP q/q
8:30 pm AUD Employment Change
8:30 pm AUD Unemployment Rate
Tentative JPY BOJ Policy Rate
Tentative JPY Monetary Policy Statement

Thursday, March 16

2:30 am JPY BOJ Press Conference
4:30 am CHF Libor Rate
4:30 am CHF SNB Monetary Policy Assessment
8:00 am GBP MPC Official Bank Rate Votes
8:00 am GBP Monetary Policy Summary
8:00 am GBP Official Bank Rate
8:30 am USD Building Permits
8:30 am USD Philly Fed Manufacturing Index
8:30 am USD Unemployment Claims

Friday, March 17

8:30 am CAD Manufacturing Sales m/m
10:00 am USD Prelim UoM Consumer Sentiment

*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar