In the second week of March, as in the first week, attention may be drawn to the issue of the spreading of the coronavirus epidemic and its potential impact on the economy and financial markets. The beginning of March brought a huge increase in the implied volatility, which can be seen by measuring the VIX indexes for currencies and the S&P 500 index.
Volatility seems to be the result of uncertainty. One day, indexes may fall by 4% to the next potentially bounce by 3%, etc. No one can predict how long the epidemic will last and what final consequences it will have for humanity and the economy. Macroeconomic data for February, excluding PMI reports for China or aggregate global PMI, were not bad. Moreover, in February, according to data published on March 6, in the United States, the non-farm payrolls raised to 273,000. The market consensus was 175,000. In turn, the unemployment rate fell again to 3.5 percent and was below the consensus pointing to 3.6 percent.
However, US macroeconomic data may not yet show what happened at the end of the month when the virus came to the US. We should wait for the data revisions. After the labor market data, there will be time to publish inflation data. The report will appear on Wednesday, March 11 at 13.30. According to the consensus, both core inflation and CPI inflation were to increase by 2.3% in February on an annual basis. Nevertheless, looking at inflation expectations in the US, it seems that the peak of inflation might be behind us.
The final reading of GDP for the fourth quarter will appear from the eurozone on 10 March. Consensus points to a possible increase of 0.1% q/q and 1% y/y. Therefore, it is not difficult to guess that in the first quarter of this year we can see the contraction of the European economy relative to the last quarter of last year. However, the most important event for financial markets will be the decision of the European Central Bank. Already on March 12 at 13:45. The ECB will announce whether it is following in the footsteps of the Fed, RBA, BoC or whether it will not change interest rates. Opinions are divided. According to money market participants, a reduction of at least 10 basis points may occur. Meanwhile, according to economists surveyed by news agencies, interest rates in the euro area will remain unchanged.
Such a discrepancy in expectations may cause an increase in the already relatively high volatility of the EUR/USD pair. This market in just two weeks increased by more than 500 pips. With high expectations for the ECB next week and even greater for the Fed on 18 March, volatility in this market may remain relatively high.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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