Week in Review: Feb 13th to Feb 17th

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Jerome Powell and Consumer Price Index (CPI)

Last week, the Chairman of the Federal Reserve, Jerome Powell, addressed the Economic Club of Washington. Traders were eager to hear any comments that would clarify the Federal Open Market Committee (FOMC) meeting or the robust jobs report from the previous week. However, Powell adhered to the FOMC’s viewpoint that the disinflation process has started. More significantly for the markets, Powell indicated that the journey to inflation recovery will be rocky and pointed to the 517,000 jobs added to the economy in January as proof. He also stated that he believes further interest rate hikes will be necessary if the labor market remains strong or inflation remains high.

This week, the US will release its Consumer Price Index (CPI) data for January, with expectations for the headline figure to drop to 6.2% YoY compared to a previous reading of 6.5% YoY and for core CPI to decrease to 5.5% YoY versus 5.7% YoY. If the reading turns out to be stronger than expected, stocks may fall and the US Dollar Index (DXY) may rise on speculation of another rate hike in March.

What’s next for RBA?

Last week, the Reserve Bank of Australia (RBA) increased the overnight rate by 25 basis points to 3.35%, as anticipated. However, what came as a surprise was the warning from the RBA that additional rate hikes might be on the horizon. The board projected that inflation will decline to 4.75% in 2023, but will not reach its target range of 2%-3% until 2025. The board also mentioned that there is a high degree of uncertainty in the outlook. This coming week, Australia will release its Labor Force data, which is expected to show a job increase of 20,000 for January, compared to a decrease of -14,600 in December. The Unemployment Rate is forecasted to remain unchanged at 3.5%.

Who’s the next Governor of BoJ?

Japan is set to announce its official nominees for the Bank of Japan (BoJ) Governor on Tuesday. The current Governor, Kuroda, is set to end his term in April. Initially, BoJ Deputy Governor Amamiya was considered the top pick and the markets favored this choice as it was believed that he would keep the same accommodative monetary policy established by Kuroda.

However, after Amamiya declined the position, it was reported that former BoJ member and professor Ueda will be chosen by Prime Minister Kishida to succeed Kuroda. The announcement caused the yen to strengthen (USD/JPY dropped from 131.57 to 129.79) as Ueda was thought to bring a more tightening policy approach to the BoJ. Nevertheless, these gains were short-lived after Ueda stated that “the Bank of Japan’s current policy is appropriate and monetary easing needs to continue at this point.” Keep an eye out for further developments regarding Ueda’s nomination over the weekend and next week to see if the markets believe he will maintain a dovish stance or adopt a less accommodative approach.

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