Week in Review: Feb 20th to Feb 24th

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FOMC meeting minutes

The Fed meeting minutes are expected to give a more thorough view of officials’ thoughts on inflation and how long they expect current interest rates to remain in place. It’s worth noting that this discussion took place before the release of US services data and the employment report, which revealed that the US economy gained an unexpected 517,000 jobs in January. The minutes might reveal if Fed officials still believe in their December dot plot, which anticipated a 5.125% interest rate by the end of 2023.

Eurozone and UK flash PMIs

Despite the steady growth in global economic activity during January, the continuation of this trend in February is still uncertain. The promptest indicators of current economic activity are the preliminary PMI surveys from S&P, and traders are keen to observe whether they indicate sustained strength in the second month of the year. While economists and traders expect the manufacturing and services surveys from the UK and Eurozone to remain relatively stable (around 50), a stronger outcome would confirm that the strong beginning to the year has carried over to February, with significant implications for the local currencies and indices.

RBNZ rate decision

The Reserve Bank of New Zealand (RBNZ) is scheduled on Wednesday, where the central bank will determine the appropriate level to set the Official Cash Rate (OCR).

KiwiBank disagrees with the market’s opinion that the RBNZ must persist in raising interest rates quickly, asserting that the RBNZ should temporarily suspend its rate hikes due to the country’s state of emergency.
Discussions regarding a 50 basis point or even a 75 basis point rate hike should be set aside. The communication process for justifying such an action in the midst of a crisis would be exceedingly challenging. Moreover, it is not justified.

There is no longer a pressing need to tighten monetary policy aggressively. Inflation has reached its peak at lower levels, and global inflationary pressures are diminishing. As it currently stands, inflation is at 7.2%, which is below the RBNZ’s forecast of 7.5%. The balance of risks is skewed to the downside, and we believe that the RBNZ should temporarily halt rate hikes next week due to the current circumstances, which warrant caution. However, our opinion on what they should do may differ from their actual decision. While we anticipate a rate hike, the focus should be on 0 or 25 basis points, rather than 50 or 75 basis points.

On the other hand, Westpac Bank analysts predict that the OCR will increase by 50 basis points to 4.75%. They noted that inflation has maintained its robustness but has not reached the extent that the Reserve Bank anticipated during its policy evaluation in November.

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