Daily Market Outlook, March 18, 2022

Overnight Headlines

Asian equity markets are mostly up this morning after gains on Wall Street yesterday. The Bank of Japan left monetary policy unchanged at its latest meeting. It said that it needed to watch rising import costs carefully but also noted downside risks to economic growth. China’s President Xi signalled a shift in its Covid fighting strategy to reduce the impact on the economy. Meanwhile, the US warned China against active support of Russia in its invasion of Ukraine.

With the week’s big central bank updates now out of the way attention is likely to turn once again to developments elsewhere including in Ukraine. Risk appetite has generally improved in markets this week. That reflects a number of factors including the fallback in energy prices and hopes that peace talks in the Ukraine may lead somewhere. Meanwhile, Asian markets in particular were given a lift by promises of new stimulus measures in China. Nevertheless, despite the more optimistic tone in markets the outlook remains highly uncertain. Indeed, the uncertainty extends beyond Ukraine to other factors including whether new lockdown measures in China will increase supply chain bottlenecks.

Following this week’s hikes in interest rates, markets will be looking for further commentary from both US Federal Reserve and Bank of England officials in coming days. Next week several speeches are scheduled from policymakers at both organisations. That will start today with updates from a couple of Fed speakers. Wednesday’s message from the Fed seemed clear. Policymakers are currently more worried about high inflation than the downside risks to growth and so seem set to tighten monetary policy aggressively both through interest rate hikes and a rundown of asset holdings. Today’s speeches may then offer little that is new but it will be interesting to see if anything more is said about the timing of policy moves.

Today’s light data calendar may attract little market attention. There are no UK releases of any note. In the Eurozone, international trade data are likely to show that import costs are rising because of energy prices. The concerns about rising wage inflation that we are seeing in the UK and US have yet to appear in the euro area and so today’s labour cost report is likely to be relatively subdued.

US housing starts rose sharply in February, but that rise is probably temporary and in part weather related. Housing is typically one of the most interest rate sensitive sectors and so both sales and construction are expected to slow in response to higher interest rates. Today’s existing home sales will be watched for early signs of this.

(Hedging effect can often draw spot toward strikes pre expiry if nearby (P) Puts (C) Calls )

EUR/USD: 1.0945-50 (673M), 1.1000 (486M), 1.1100-10 (1.44BLN) 1.1140-50 (487M), 1.1200 (627M)
GBP/USD: 1.3200 (355M), 1.3310 (300M), 1.3500 (445M)
EUR/GBP: 0.8350 (296M), 0.8445-50 (921M)
USD/JPY: 116.90-00 (1.56BLN), 117.50 (520M), 117.75 (510M) 118.00 (509M), 118.25 (300M), 119.00 (505M), 119.50 (350M)
USD/CAD: 1.2300 (310M), 1.2495-00 (322M)
AUD/USD: 0.7300 (362M), 0.7340-45 (320M), 0.7350-55 (715M) 0.7400 (517M). USD/ZAR: 15.45 (400M)