Global: Multiple shocks test resilience The resilience of the global economy is tested by multiple shocks: rising Covid-19 infections in China, the war in Ukraine, the huge increase of several commodity prices, the prospect of aggressive monetary tightening in the US. The significant carry-over effect from last year is an element of support when assessing the outlook for annual growth this year. In addition, the drivers of final demand were supportive at the start of the year and in many cases still are. High inflation is weighing on consumer sentiment in the US and the Eurozone but fortunately, thus far, employment expectations of Eurozone companies remain at a very high level and in the US, the labour market remains very strong. It will play a fundamental role in shaping expectations about the growth and hence monetary policy outlook. US: Stress tests With inflation soaring, the US Federal Reserve announced that it would accelerate the process of normalising its monetary policy. Held near the lower zero bound until March, the key policy rate should rise to roughly 2% or even higher by the end of the year. The Fed will also reduce the size of its balance sheet. Operating at full employment, the US economy seems to have recovered sufficiently from the health crisis to pass muster. Yet it is still sensitive to credit conditions and is not immunised against the impact of the war in Ukraine. Download the full report

While the consumer price index (CPI) may get the most headlines, the measure of inflation that’s reportedly of greater significance for Federal Reserve policy makers is the core inflation rate, which measures inflation for all items excluding food and energy. In February and March, this metric clocked in at 6.4%, year-over-year — the highest figure since 1982. At this level, an inflationary psychology is becoming an increasing concern, as households and businesses incorporate expectations of elevated inflation in their contractual arrangements. If unchecked, these expectations can become self-fulfilling prophesies. I share this concern and for that reason support the Fed’s planned program to reduce the pace of monetary expansion and raise interest rates. Although this shift in the Fed’s emphasis will likely dampen the pace of economic activity, we can afford that sacrifice because we’re starting from a place where the economy has been growing at a healthy rate and the unemployment rate has reached its lowest level (3.6%) since the start of the pandemic. As this new policy orientation takes hold, we should be clear about what it will likely accomplish and what it won’t. Specifically, I expect ongoing vigilance by the Fed to keep inflationary expectations under control. On the other hand, we should realize that the Fed has no capacity to roll back prices in markets where chronic shortages are present. Put another way, high inflation is a distinct problem from that of high prices; and while we can look to the Fed to help counteract the former, we can’t expect it to do much, if anything, about the latter. By definition, a shortage exists when something that is desired isn’t available in sufficient amounts. Economists characterize this state as one in which demand exceeds supply. In a free market, price adjustments serve to alleviate this problem. That is, the price of the scarce good would rise until a balance between quantities supplied and demanded are restored. This market-clearing price is termed the equilibrium price. Obviously, those unable or unwilling to pay the new equilibrium price would be forced to accommodate by either (a) purchasing cheaper, substitute goods, (b) scaling back on their purchases, or (c) doing without altogether. In any case, the price would be functioning as a rationing mechanism; and without reliance on prices to serve this purpose, we’d have to employ some rule-making bureaucracy to allocate the scarce goods. Some may feel that allowing prices to serve this rationing function is inherently unfair as the end result clearly favors the rich, for whom the higher price wouldn’t be an impediment. True enough; but even with this recognition, having prices functioning to ration scarce goods still beats out the other alternatives. That said, I recognize the need for some accommodations for special cases, as in “necessities.” Defining what qualifies as a necessity, however, is a fraught exercise. We should all agree that potable water is a necessity, but as we extend consideration to food, shelter, and health care — all seemingly necessary for the maintenance of civilized lives — consensus as to what is truly necessary starts to fray. If concerns about high prices are sufficiently dire, Congress and the administration could take action to mitigate the pain. Gas prices, of course, have captured national attention as the poster child for this problem; and in response to the high prices we’re experiencing, Biden has authorized release of 1 million barrels a day from our strategic oil reserves. In a word, this is a dumb plan. The idea of bringing down a particular price for everyone is overly ambitious. It can’t be done in a way that would be truly meaningful for anyone. A more targeted approach should certainly be preferred. (Regardless, if we are willing to draw down strategic reserves, the better plan would be to direct that oil to our NATO allies to strengthen the resolve of the coalition to isolate Putin.) As far as how to counter high prices, my idea would be to restrict assistance to those feeling the most pain. This objective could be realized by providing income supplements to poor people — i.e., people who already qualify for government safety net programs like food stamps, unemployment, housing assistance, and/or whatever. Such a design would obviate the need to establish any new qualifying hurdles for participation in the program. All that would be required is additional funding authorizations. Amounts of these supplements could be adjusted to respond to the excess of the price index for some critical basket of goods (or perhaps just gas by itself in the current situation), verses some threshold level. The higher the index relative to the threshold, the larger the benefit, and vice versa. The new supplemental assistance could function as an automatic stabilizer, bumping the benefits provided under existing satetynet programs as needs grow, with...

GBP/USD registered small weekly gains on the back of Wednesday's sharp upsurge. Near-term technical outlook suggests that the bearish bias stays intact. A daily close below 1.3000 could open the door for additional losses. After dropping to its lowest level since November 2020 at 1.2974 earlier in the week, GBP/USD has managed to stage a rebound. Although the broad-based dollar strength didn’t allow GBP/USD to gather further bullish momentum in the second half of the week, the pair ended up closing above 1.3050 to snap a two-week losing streak.  What happened last week? The risk-averse market environment and rising US Treasury bond yields helped the greenback outperform its rivals at the beginning of the week. On Tuesday, the US Bureau of Labor Statistics reported that annual inflation in the US, as measured by the Consumer Price Index (CPI), jumped to a fresh four-decade high of 8.5% in March from 7.9% in February. Further details of the report revealed that the Core CPI, which excludes volatile food and energy prices, edged higher to 6.5% from 6.4% in the same period, compared to the market expectation of 6.6%. Although the initial market reaction to the US inflation report caused the dollar to lose some interest, hawkish Fed commentary triggered a rally in US T-bond yields late Tuesday. Fed Vice Chair Lael Brainard said that reductions in the balance sheet could come as soon as June after a decision is finalized at the May policy meeting. Additionally, Richmond Fed President Thomas Barkin argued that interest rates should be moved rapidly to neutral. The UK’s Office for National Statistics (ONS) announced on Tuesday that the ILO Unemployment Rate in February edged lower to 3.8% from 3.9% but this reading failed to trigger a noticeable market reaction. On Wednesday, the ONS’ monthly publication revealed that the annual CPI in the UK climbed to 7% in March from 6.2% in February, surpassing analysts’ estimate of 6.7%. Regardless of the hot UK inflation data, GBP/USD struggled to gain traction until the dollar came under heavy selling pressure amid slumping US yields during the American trading hours on Wednesday. After rising more than 100 pips on Wednesday, GBP/USD extended its recovery to a fresh nine-day high of 1.3150 in the early European session on Thursday. With the European Central Bank (ECB) leaving its policy settings unchanged, however, the greenback regathered its strength and forced GBP/USD to turn south. Nevertheless, the sharp decline witnessed in EUR/GBP following the ECB event suggested that the British pound was able to capture some of the outflows out of the euro. Hence, GBP/USD stabilized above 1.3050 on Easter Friday and registered modest gains for the week. Next week The economic calendar will not be offering any high-tier data releases in the first half of the week that could impact GBP/USD’s action in a significant way. The US Federal Reserve will release its Beige Book on Wednesday and the UK’s ONS will publish March Retail Sales data for the UK on Friday, which is expected to show a monthly contraction of 0.3%. Finally, the S&P Global’s preliminary April Manufacturing and Services PMI reports for both the UK and the US will be looked upon for fresh impetus ahead of the weekend. In case these data highlight that the business activity in the US private continues to expand at a more robust pace in April than in the UK, GBP/USD is likely to stay on the back foot and vice versa. The Bank of England (BOE) is facing a tougher balancing act than the US Federal Reserve with regard to policy tightening. Both central banks look to battle inflation but the BOE is growing increasingly concerned over the uncertainty surrounding the growth outlook in the face of a protracted Russia-Ukraine conflict. On Thursday, FOMC Chairman Jerome Powell will speak at "The International Monetary Fund Debate on the Global Economy." The fundamental outlook suggests that GBP/USD is likely to find it difficult to stage a steady recovery at least until markets are convinced of the BOE’s willingness to adopt a more aggressive tightening stance. On the other hand, GBP/USD’s losses could stay limited in the near term as the British pound still remains a better alternative than the euro and the Japanese yen. GBP/USD technical outlook The Relative Strength Index on the daily chart stays below 50. Additionally, GBP/USD failed to close the day above the 20-day SMA on Wednesday despite the impressive recovery, highlighting bears' dominance in the near term.  Nevertheless, 1.3000 (psychological level, static level) aligns as strong support and sellers could see a decline toward that level as an opportunity to book their profits. In case fundamental drivers continue to weigh on GBP/USD and force a daily close below that level, the next bearish targets could be seen at 1.2920 (static level) and 1.2750 (static...

Gold closed the second straight week in positive territory. XAU/USD could extend its rally toward $2,000 before turning overbought. Safe-haven flows continue to dominate the markets amid inflation fears, geopolitical tensions. Gold managed to build on the previous week’s gains and registered its highest weekly close in a month above $1,970. The yellow metal ignored rising US Treasury bond yields for the majority of the week and continued to find demand as an inflation hedge and a safe haven. What happened last week? Gold started the week on a firm footing but erased a large portion of its daily gains after rising all the way to $1,970 on Monday. The negative shift witnessed in risk sentiment on Tuesday provided a boost to the yellow metal. Fading hopes about Russia and Ukraine reaching a peace agreement, the ongoing coronavirus-related lockdowns in China and inflation fears forced investors to seek refuge. Reflecting the sour market mood, major equity indices in the US suffered heavy losses.  The US Bureau of Labor Statistics reported that inflation, as measured by the Consumer Price Index (CPI), surged to a new multi-decade high of 8.5% on a yearly basis in March from 7.9% in February. In the same period, the Core CPI edged higher to 6.5% from 6.4%. The broad-based selling pressure surrounding the greenback on Wednesday allowed XAU/USD to extend its rally to a fresh monthly high of $1,981. In the absence of high-impact macroeconomic data releases, the sharp decline witnessed in the US Treasury bond yields made it difficult for the dollar to find demand. On Thursday, surging US T-bond yields and the renewed dollar strength capped gold’s weekly gains. Following the April policy meeting, the European Central Bank (ECB) announced that it left its policy settings unchanged. The ECB decided to stick to its plan of reducing net asset purchases under the Asset Purchase Programme (APP) to €20 billion in June before concluding the QE in the third quarter. During the press conference, ECB President Christine Lagarde repeated that the rate increase would come ‘some time’ after the end of the APP. EUR/USD touched its lowest level in two years below 1.0800 post-ECB, reflecting the market pricing of the ECB-Fed policy divergence. Moreover, the benchmark 10-year US T-bond yield rose 4.5% and settled above 2.8% ahead of the Easter holiday. Although XAU/USD dropped all the way to $1,960 during the dollar rally on Thursday, it almost fully retraced its daily decline and closed the week above $1,970. In the meantime, XAU/EUR rose nearly 2% on a weekly basis, helping the precious metal stay resilient in the face of surging US yields.  Next week China will release the Gross Domestic Product (GDP) on Monday, which is expected to show an annualized growth of 4.4% in the first quarter. A weaker-than-forecast GDP print could cause markets to turn risk-averse at the start of the week and help gold find demand and vice versa. On Wednesday, the Fed will publish its Beige Book and investors will pay close attention to the details surrounding price pressures. On Friday, the S&P Global’s preliminary April Manufacturing and Services PMI reports for the US will be looked upon for fresh catalysts. The headline PMI figures are expected to confirm that the business activity in the private sector continued to expand at an impressive pace in early April. Unless these reports point to a significant loss of momentum in activity, the dollar should be able to hold its ground against its major rivals. On Thursday, FOMC Chairman Jerome Powell speak on the global economy at an event organized by the International Monetary Fund. The CME Group FedWatch Tool shows markets are pricing in a nearly-70% probability of back-to-back 50 basis points Fed rate hikes in May and June, compared to 55% last week. Despite this 15% increase in the odds of a total of 100 bps hike by June, the 10-year US T-bond yield rose 4% on a weekly basis. This development suggests that the Fed’s aggressive tightening outlook is now largely priced in and US yields could find it hard to push higher in the near term. In such a scenario, gold could continue to stretch higher. Gold technical analysis Gold closed the last five trading days above the 20-day SMA. Additionally, the Relative Strength Index (RSI) indicator on the daily chart holds near 60, confirming that bulls remain in control of gold’s price action. On the upside, $1,990 (Fibonacci 23.6% retracement of the February - mid-March uptrend) aligns as first resistance. With a daily close above this level, XAU/USD could target $2,000 (psychological level) and $2,010 (March 10 high). $1,950 (Fibonacci 38.2% retracement, 20-day SMA) forms a key support. In case this level turns into resistance, a deeper downward correction toward $1,930 (50-day SMA) and $1,920 (Fibonacci 50% retracement) could...

EUR/USD Current Price: 1.0834 Trading is expected to be dull at the end of the week as most countries celebrate Good Friday. The European Central Bank decided to maintain its monetary policy on hold. EUR/USD recovered from a fresh 2-year low of 1.0756 but is still on the bearish path. The EUR/USD pair plunged to 1.0756, its lowest since May 2020, following tepid US data and a dovish European Central Bank monetary policy decision. The central bank kept rates on hold as widely anticipated and repeated that it would end its bond-buying program in the third quarter of the year. Monthly net purchases will amount to €40 billion in April, €30 billion in May and €20 billion in June. The statement was quite dovish, as it noted that Russia's aggression is affecting the economies in Europe and beyond. Higher energy and commodity prices are affecting demand and slowing production, which results in higher inflation. Also, trade disruptions are leading to new shortages of materials and inputs, another factor weighing on prices pressure. President Christine Lagarde said it was “premature” to discuss quantitative tightening, adding that rate hikes could begin “sometime after”  the end of the APP program. Across the pond, the US released March Retail Sales, which were up by 0.5% MoM, below the 0.6% expected. Also, Initial Jobless Claims for the week ended April 8 printed at 185K, worse than anticipated. Finally, the country published the preliminary estimate of the April Michigan Consumer Sentiment Index, which printed at 65.7, better than the 59 expected. Additionally, New York Federal Reserve President John Williams hit the wires, saying that the central bank should reasonably consider hiking by 50 bps in May. Most financial markets will be closed on the last day of the week amid the Good Friday holiday. Nevertheless, the US will release some macroeconomic figures, including March Industrial Production and Capacity Utilization and the April New York State Manufacturing Index. EUR/USD short-term technical outlook The EUR/USD pair bounced from the mentioned low, heading into the daily close trading around the 1.0830 level. The daily chart shows that the bearish case remains firmly in place as it trades below bearish moving averages, while technical indicators turned lower within negative levels, with room to extend their slides.  The near-term picture is also bearish. The 4-hour chart shows that the pair settled below bearish moving averages, with the 20 SMA currently providing dynamic resistance at around 1.0860. The longer moving averages maintain their bearish slopes above the level, while the Momentum indicator heads firmly lower within negative levels. The RSI indicator, in the meantime, consolidates at around 41. The 1.0760 level is a strong long-term static support level, and the pair bounced after testing it. Nevertheless, it remains on the losing side and could only turn bullish once above the 1.0960 region. The next relevant bearish target is 1.0635, the March 2020 low. Support levels: 1.0800 1.0760 1.0720 Resistance levels: 1.0860 1.0920 1.0965   View Live Chart for the EUR/USD

ECB leaves rates, asset policies unchanged as expected. Lagarde signals a new assessment in June. Cites the risks of the Ukraine war to growth while acknowledging inflation. Facing the risks of European war for the first time in two generations, the ECB will keep its economic support untouched despite inflation that has rocketed to nearly four times its official target.  Bank President Christine Lagard, who is recovering from covid, said in her virtual press conference that exiting bond-buying is a necessary precursor for a rate increase, which could occur “anywhere between a week to several months” after the end. The ECB’s -0.5% deposit rate and 0.0% interest rate were left untouched.  “Monthly net purchases under the APP will amount to 40 billion euros in April, 30 billion euros in May and 20 billion euros in June,” noted the policy statement accompanying the rate decision.  Ms Lagarde repeated the bank’s previous promise to end bond purchases in the third quarter but declined to be more precise despite reporters' questions. At the 10 billion euros monthly reduction in the bank’s statement the program would end with the final tranche in August.  Futures markets are currently pricing 0.25% increases at the September and December ECB meetings. Eurozone inflation was 7.5% in March with some countries like Spain higher and others as Germany lower. The ECB’s official inflation target is 2%.  Eurozone inflation Ms Lagarde acknowledged that inflation is rising. “Upside risks surrounding the inflation outlook have also intensified, especially in the near-term,” she noted. “The last thing we want to see is inflation expectations at risk of being de-anchored,” she said.  The European Central Bank is far behind the Federal Reserve, which has hiked 25 basis points once and is expected to enact a 50 point increase at its May 4 meeting and to begin a $95 billion monthly reduction of its $9 trillion balance sheet. The Bank of Canada has raised its overnight rate twice, the last time 0.5% at its April 13 meeting. The Bank of England raised its base rate by 0.25% to 0.75% in March. Russia’s invasion of Ukraine and the subsequent sanctions on Moscow and the possibility of cuts in natural gas supplies to Western Europe have played havoc with the Eurozone economy.  Several economic institutes advising the German government warned that an interruption of Russian energy supplies to the country could strike a 220 billion euro ($240 billion) blow to the economy, equal to 6.5% of annual output. Germany imports about half of its natural gas from Russia.   Moscow has not threatened to cut off the flow and, except for higher prices, gas has continued to stream unimpeded to Germany since the invasion began on March 24.  Markets were unimpressed with the ECB’s caution. The EUR/USD closed about 60 points lower on the day at 1.0825 but it had traded as low as 1.0758 during Mr Lagrde’s press conference.  German and French bond yields rose with the 10-year returns closing at 0.851% and  1.337% respectively.  10-year Bund CNBC