Risk sentiment soured yesterday as investors worry about faster Fed rate hikes and some signs that the global cycle is weakening. The losses in the stock market should also be seen in the light of the recent market recovery, which may have been used by investors to take some risk off the table. Bond yields retreated again yesterday, adding to signs that the big bond market sell-off seen in the first two months of the year is over for now. US data also surprised on the downside again as Chicago PMI fell to 65.7 in February from 61.9 and pending home sales dropped 4.7% m/m in January. Bonds also got some tailwind from a slide in oil prices following data, which showed a rise in US oil inventories.
The dollar held firm on Thursday, drawing support after the Federal Reserve’s new chief Jerome Powell struck an optimistic tone on the U.S. economy in a boost to rate hawks that sent global stocks tumbling.
In contrast, benign inflation data in the euro zone dented expectations that the European Central Bank will dial back its stimulus, slamming the euro to five-week lows against the dollar and a six-month nadir against the yen. Euro zone inflation slowed to a 14-month low in February, data showed on Wednesday, underscoring why the ECB remains cautious about removing stimulus despite growth exceeding expectations.
The euro was also hurt by political uncertainties as Italians are preparing to vote in a national election on Sunday, while the leading political parties in Germany decide on a coalition deal that would secure Angela Merkel a fourth term as chancellor.
Sterling was pressured by renewed worries over Brexit after British Prime Minister Theresa May said the EU’s draft legal text published on Wednesday would undermine Britain and threaten its constitutional integrity.
The economic calendar comes with major economic events with high impact which should provide moderate to high volatility mainly in the European and American sessions. Moderate to high volatility is expected for the release of economic data such as the PCE Core, ISM Manufacturing, Fed Powell Testimony, Fed Dudley Speech, Eurozone Market Manufacturing PMI Final, Italy Unemployment Rate.