The Big Hold

USD recovered this week’s losses. The modest widening in US-G6 2-year bond yield spread is offering USD support. Nevertheless, the relief bounce in USD faces significant headwind as the US growth outlook exceptionalism is fading.

The Atlanta Fed GDPNow model estimates Q1 growth at -1.8% SAAR vs. -2.1% on March 17 driven by an improvement in business investment. The model’s forecast for Q1 real gross private domestic investment growth increased from 7.2% to 9.1% after yesterday’s positive set of data (housing starts, industrial production and capacity utilization, import and export prices).

In contrast, the Atlanta Fed GDPNow model’s forecast for Q1 real personal consumption expenditures growth declined from 1.1% to 0.4% following the mixed February retail sales report. Meanwhile, high-frequency data are flashing red. The New York Fed services business activity plunged to -19.3 vs. -10.5 in February, the lowest in more than a year.

We expect the FOMC to deliver a neutral hold (6:00pm London). The Fed funds target rate is widely expected to remain steady at 4.25-4.50%. The policy decision should be unanimous as Fed officials have largely maintained that there was no urgency to resume easing. But the FOMC statement will likely be tweaked to reflect elevated levels of uncertainty and softening economic activity. Updated Dot Plots and macro forecasts are likely to remain more or less steady. The 2025 Dots should still imply 50bp of cuts.

Fed Chair Jay Powell’s post meeting press conference may not offer much policy guidance (6:30pm London). In his March 7 speech, Powell delivered the definitive Fed stance. He maintained his caution, noting “Despite elevated levels of uncertainty, the U.S. economy continues to be in a good place. We do not need to be in a hurry, and are well positioned to wait for greater clarity.” Powell acknowledged the potential impact of Trump policies but noted “While there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their likely effects remains high.”

Finally, the Fed could announce slowing or pausing the unwind in Treasury holdings. The FOMC minutes of the January 28-29 meeting revealed that policymakers discussed pausing or slowing the pace of decline of its securities holdings in part because of “the potential for significant swings in reserves over coming months related to debt ceiling dynamics.” Since then, there has been little in the way of new developments and bank reserves have actually risen. As such, we see no change to the current pace of QT whereby the Fed is allowing up to $25bn in Treasuries and $35bn in mortgage-backed securities to mature each month without reinvesting the returned principal.

JAPAN

The Bank of Japan (BOJ) delivered a cautious hold and warns against a weaker yen. USD/JPY rallied briefly above 150.00 before paring back gains to 149.20. As was widely expected, the BOJ left the policy rate unchanged at 0.50%. The decision was unanimous. BOJ Governor Ueda reiterated the bank’s guidance that it would continue to raise the policy interest rate if the outlook for economic activity and prices will be realized, adding real interest rate is very low.

However, the BOJ cautioned “there remain high uncertainties surrounding Japan's economic activity and prices, including the evolving situation regarding trade…” The comments reinforce market pricing for a BOJ terminal rate of 1.00% to 1.25% over the next two years with the next full 25bps hike in September.

The limited room for a further upward adjustment to BOJ rate expectations curtails JPY upside. Meanwhile, JPY downside is contained as the BOJ signaled little tolerance for a weaker currency. “With firms' behavior shifting more toward raising wages and prices recently, exchange rate developments are, compared to the past, more likely to affect prices.” Bottom line: USD/JPY faces important resistance at the 200-day moving average around 152.00.

EUROZONE

EUR/USD is down near 1.0900, reflecting the broad bounce in USD. The Eurozone Q4 labor costs print is today’s domestic focus (10:00am London). The ECB projects labor costs growth to slow to 4.1% y/y in Q4 vs. 4.6% in Q3 and drift down to its historical average of 1.7% by 2027.

The Eurozone disinflationary process remains well on track. Markets price-in about 50% odds of a 25bps ECB cut to 2.25% at the April 17 meeting and a total of 50bps of easing over the next 12 months. Looser fiscal policy in Germany and the EU’s military build-up plan lessens the need for the ECB to slash rates more than is currently priced-in which is EUR supportive.

NEW ZEALAND

NZD/USD retraced some of this week’s gains on USD strength. New Zealand’s annual current account deficit narrowed to -6.2% of GDP in Q4 from -6.5% in Q3. The current account deficit remains large by historical standards, suggesting NZD needs to keep trading at a deep discount to fundamental equilibrium to attract foreign investments and finance this deficit. We estimate long-term fundamental equilibrium for NZD/USD at around 0.6700.

CANADA

USD/CAD is holding above its 100-day moving average at 1.4247. Canada inflation ran hot in February. Headline inflation rose to 2.6%y/y (consensus: 2.2%) vs. 1.9% in January. Core inflation (average of trim and median CPI) quickened to 2.9% y/y (consensus: 2.75%) vs. 2.7% in January. Sales taxes were reapplied to eligible products mid-February which put upward pressure on consumer prices as taxes paid by consumers are included in the CPI.

Headline and core CPI inflation are tracking above the Bank of Canada’s (BOC) Q1 projection of 2.1% and 2.5%, respectively. The implication is the BOC has limited room to ease policy further to offset the drag to growth from heightened trade policy uncertainty. The combination of high inflation and unfavorable growth prospect is a drag for CAD.

TURKEY

USD/TRY surged as much as 10% due to Turkish political uncertainty. Turkish authorities detained Ekrem Imamoglu, President Recep Tayyip Erdogan’s most prominent rival, in a widening crackdown on opposition figures. The slump in TRY is exaggerated. TRY is significantly undervalued, the real policy rate is positive, and the current account deficit is small at less than 1% of GDP.

INDONESIA

USD/IDR is steady around 16525.00. As was widely expected Bank Indonesia (BI) left the policy rate unchanged at 5.75%. BI still sees room to cut but the timing will depend on the global situation.

BRAZIL

Brazil COPOM is expected to raise the policy rate 100bps to 14.25% (9:30pm London). At the last policy meeting January 29, the central bank hiked rates 100bps for the second straight time to 13.25% and said a similar hike would be seen at the next meeting March 19. Since then, headline inflation came in as expected at 5.06% y/y vs. 4.56% in January. This was the first acceleration since November to the highest since September 2023 and above the 1.5-4.5% target range. Looking ahead, the swaps market is pricing in 175 bp of total tightening over the next six months that would see the policy rate peak near 15.00%.