Federal Reserve Officials Suggest Monetary Tightening, Markets Respond Positively

March 31, 2023

Recent market gains were heavily influenced by statements from Federal Reserve officials who suggested the need for further monetary tightening, despite recent bank failures. Boston Fed President, Susan Collins, highlighted the importance of tightening policies. Meanwhile, Richmond Fed President, Thomas Barkin, stated that the Fed could increase rates further if inflation risks persist. Minneapolis Fed President, Neel Kashkari, expressed his commitment to bringing inflation back to 2% but also acknowledged that the impact of recent financial-system turmoil is not fully clear.

While some investors anticipated a decrease in US interest rates by around 70 basis points to 4.3% by year-end, some strategists disagree with the market’s expectations of rate cuts this year. Despite financials being under pressure, the S&P 500 benchmark gained 0.6%. The tech-heavy Nasdaq 100 also rose 0.9%, pushing further into a bull market. Ten out of eleven sectors in the S&P 500 remained in positive territory, with the Real Estate sector achieving the best performance among all groups, rising 1.22% for the day. Additionally, the Dow Jones Industrial Average rose 0.4%, while the MSCI world index rallied by 1.2% daily on Thursday.

Main Pairs Movement

The US Dollar experienced a 0.46% daily loss due to data on Thursday showing a moderate increase in Americans filing new claims for unemployment benefits. However, there were no significant signs that tightening credit conditions were impacting the tight US labor market. The DXY index remained weak for the day, with heavy selling during the UK trading session, closing at 102.17 level at the end of the day.

On the other hand, the euro rose to a one-week high against the US dollar on Thursday, boosted by German inflation data and a decrease in concerns over the banking sector. The EURUSD surged by 0.56% on Thursday, reaching the weekly high of 1.0926 level ahead of the American trading hour, and closed at 1.0905 level. Additionally, the GBPUSD also experienced a 0.58% daily gain.

Gold witnessed a significant rally on Thursday, experiencing an 0.80% daily gain and reversing the previous week’s loss ahead of key inflation data from the United States and Eurozone. The XAUUSD saw demand during American trading hours and touched the weekly high of the $1984 mark.

Technical Analysis

EURUSD (4-Hour Chart)

The EUR/USD pair advanced higher on Thursday, extending its daily rally to a daily high around the 1.0920 area but then surrendered some of its daily gains amid the risk-positive market environment. The pair is now trading at 1.09031, posting a 0.55% gain daily. EUR/USD stays in the positive territory amid the weaker US Dollar across the board, as the greenback continued to fall after the US Bureau of Labor Statistics (BLS) revealed unemployment claims. The US Weekly Initial Jobless Claims rise to 198K, coming in worse than the market expectation of 196K. The higher-than-expected Initial Jobless Claims and lower-than-forecast Gross Domestic Product suggest the labor market may be weakening and could encourage the Fed to pause and not hike rates at their next meeting, which exerted bearish pressure on the US Dollar. In the Eurozone, the Euro hits fresh highs following the easing Eurozone inflation data, as the data released on Thursday showed that inflation in Germany, the Consumer Price Index (CPI), declined to 7.4% YoY in March.

For the technical aspect, RSI indicator 68 figures as of writing, suggesting that the pair could witness some short-term corrections as the RSI retreated slightly from the overbought zone. As for the Bollinger Bands, the price dropped after touching the upper band, therefore some downside movements can be expected. In conclusion, we think the market will be slightly bearish as long as the 1.0915 resistance line holds. An upward extension could be expected if the pair break above the 1.0915 level.

Resistance: 1.0915, 1.0990

Support: 1.0831, 1.0748

XAUUSD (4-Hour Chart)

As higher-than-expected Initial Jobless Claims and lower-than-forecast Gross Domestic Product suggest the US Federal Reserve may pause its rate-hiking agenda on Thursday, the pair XAU/USD witnessed fresh buying and advanced sharply to refresh its daily high above the 1,980 mark during the US trading session. The Gold price is trading at 1,982 at the time of writing, rising 0.91% daily. Despite Fed Chairman Jerome Powell saying privately that the Federal Reserve expects one more rate hike this year but markets disagree, as investors estimated that the US Federal Reserve would not hike rates at the May meeting with chances of a 0.25% hike falling slightly to 44%. Meanwhile, demand for safe-haven assets remains subdued as easing concerns about the banking sector’s health underpin the market mood, which further undermined the US Dollar and lifted the Gold price higher. On top of that, the Fed’s preferred gauge for inflation, the US Core Personal Expenditures – Price Index (PCE) for February, will be revealed on Friday.

For the technical aspect, the RSI indicator is 60 figures as of writing, suggesting the bearish tilt in the short-term technical outlook as the RSI has retreated slightly from 60. As for the Bollinger Bands, the price failed to extend the upside traction and edged lower, therefore some downside movements can be expected. In conclusion, we think the market will be slightly bearish as long as the 1,988 resistance line holds. However, technical indicators remain near overbought readings with uneven directional strength, still supporting the bullish bias.

Resistance: 1988, 2003

Support: 1969, 1952

Economic Data