The week ahead has several events that have the potential to move the market. In France, the presidential election is in the spotlight. Following the first round this weekend, incumbent president Emmanuel Macron will face Marine Le Pen in the election runoff.
There are fears that Le Pen, who is seen as a representative of the extreme right, could receive strong support, and a potential win might negatively impact France's relationship with the EU and NATO in the long term. With France being the second largest economy in the EU, potential polls favouring Le Pen in the runoff could have some impact on the European markets and the euro.
This week will also see the release of several surveys in Europe, the US CPI m/m, the US PPI, the RBNZ rate statement and official cash rate, the CPI y/y for GBP. The BOC and ECB will both have press conferences and some comments from BOJ Gov Kuroda and FED members are also expected. Friday is a bank holiday in Europe so low volatility is expected as traders are heading into the Easter holiday.
The US CPI is expected to rise again and it's likely to add to FED hawkishness which could boost the USD. The DXY is at the highest level in two years, and it could go higher in the near term.
RBNZ seems committed to raising rates aggressively to keep inflation under control. Some analysts believe there's a possibility they overtighten and if this happens the bank could be forced to reprioritize to limit the negative growth effect.
In the medium term the prospects for NZD are bullish, but in the short term the NZD/USD H1 chart looks good for selling opportunities. A correction is expected, and the first level of resistance is at 0.6905. If rejected the next target could be 0.6729.
At the next ECB meeting the bank's policy is expected to remain unchanged, but analysts at Barclays believe that high inflation will likely pressure the ECB to signal its future policy plans.
The stagflation narrative in Europe seems to be the main theme at the moment with fears that an economic slowdown in China and rising commodity prices will put pressure on the euro area.
Citi analysts point out that Europe "is facing the worst terms of trade shock since the 70s, which opens up the risk of European recession this year -- albeit their base case is that this is narrowly avoided." If the ECB begins its policy normalization it could support the Euro "if it slows structural outbound European sovereign yields vs FX hedged USTs."
EUR/USD has prospects for further depreciation. From a technical perspective on the H1 chart we can see a bullish divergence which means the pair can have a bigger correction until 1.0970. If that level holds it can continue its descending trend with the next targets at 1.0825 and 1.0760.
For the Canadian dollar, analysts at Citi now expect 50 bp hikes from the BOC in April, June and July this year, followed by 25 bp increments to reach 2.7% by the end of the year. The CAD will also be supported by high commodity prices for the near future.
However, the USD/CAD closed near the 1.2600 level of resistance last week, and even if the overall outlook is bearish, it's possible that the pair could climb higher until the end of the month. The next level of support is at 1.2525 and if rejected the pair can go to test the resistance at 1.2650.
Despite favourable conditions for the CAD, the USD was strengthened by the rising US yields and more US data points like the CPI, PPI and Retail Sales are expected to show gains for March, which will further support the USD.
According to analysts at Scotiabank, the upcoming BOC policy statement, the monetary policy report and Governor Macklem’s press conference will have a hawkish undertone for the CAD, but "there's a risk that either a) policy makers fail to deliver what is already priced in for the next week or b) do not prove sufficiently hawkish guidance to justify what the swaps curve have priced in for the coming months." The analysts advise a neutral stance on CAD until more developments this week.
As for other currencies, GBP remains bearish in the near future with the mention that there are usually some strong seasonal performances for GBP in April that may be linked to fiscal and dividend impacts. For the last few years, the GBP/USD has had a bullish seasonality in April. Whether this will repeat this year it remains to be seen. In terms of monetary policy, it is more likely for the BOE to have a hawkish message than the ECB, BOJ and even SNB. Inflation in the UK is likely to rise further to 6.5% year over year.
Nothing new is expected from Kuroda this week as it seems a weaker JPY is not seen as a problem for now. I expect that USD/JPY will enter a consolidation phase in the week ahead and the JPY to remain weak until something new comes that could change the narrative.
The SNB is not yet signalling a dovish stance despite further CHF strength. In the future, "a push below parity vs EUR, if seen, may trigger political pressure on the SNB to weaken CHF via modest FX intervention," City analysts say.
This article was written by Gina Constantin.
