EUR/USD

U.S. consumer spending barely rose in January and income increased modestly in February, suggesting the economy was fast losing momentum after growth slowed in the fourth quarter.

The report from the Commerce Department on Friday also showed price pressures muted in January, with a measure of overall inflation posting its smallest annual increase in nearly two-and-a-half years.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, edged up 0.1% as households cut back on purchases of motor vehicles. Spending fell 0.6% in December.

The market had forecast consumer spending increasing 0.3% in January. The release of the January consumer spending figures was delayed by a five-week partial shutdown of the federal government that ended on January 25.

When adjusted for inflation, consumer spending gained 0.1% in January after dropping 0.6% in December.

The weak consumer spending report extended the run of soft data ranging from housing starts to manufacturing that have flagged a sharp slowdown in growth early in the first quarter. The economy's outlook is also being overshadowed by slowing global growth, Washington's trade war with China and uncertainty over Britain's departure from the European Union.

GDP for the first quarter are as low as a 0.9% annualized rate. The economy grew at a 2.2% pace in the fourth quarter after expanding at a brisk 3.4% rate in the July-September period.

But the Fed's decision to shelve further monetary policy tightening could prop up the interest-rate-sensitive housing market. A second report on Friday from the Commerce Department showed new home sales rose 4.9% to a seasonally adjusted annual rate of 667k units in February, the highest level since March 2018.

The housing market, however, accounts for a small fraction of the economy. A recovery in the sector, which hit a soft patch last year, will probably not be enough to blunt the impact on growth from slowing consumer spending and manufacturing.

A third report from the University of Michigan showed a rise in consumer sentiment in March. Economists, however, did not expect this to translate into stronger consumer spending as other confidence measures softened during the month.

In January, spending on goods fell 0.2% after dropping 2.4% in December. It was the second straight monthly decline in spending on goods and reflected a decrease in motor vehicle purchases.

Outlays on services rose 0.2% as consumers paid more for financial services and insurance, after increasing 0.3% in December.

With demand softening, inflation pressures were tame in January. The PCE price index fell 0.1%, reversing December's 0.1% gain.

In the 12 month through January, the PCE price index rose 1.4%, the smallest rise since September 2016 after increasing 1.8% in December.

Excluding the volatile food and energy components, the PCE price index ticked up 0.1% in January after rising 0.2% in the prior month. That lowered the year-on-year increase in the so-called core PCE price index to 1.8% from 2.0% in December.

The core PCE index is the Fed's preferred inflation measure. It hit the U.S. central bank's 2% inflation target in March last year for the first time since April 2012.

In February, personal income increased 0.2% after dipping 0.1% in January. Incomes have been volatile in recent months because of one-off factors, including government payments to farmers caught in the U.S.-China trade war.

Barely a week after the U.S. Federal Reserve called a halt to interest rate hikes, policymakers are now battling a view growing in financial markets, and embraced by the Trump administration, that the Fed will need to cut rates before long.

Larry Kudlow, President Donald Trump's top economic advisor, said that while there is "no emergency," the Fed should cut rates to protect the U.S. economy from slowing down.

But no fewer than five Fed officials in the past 24 hours have touted the underlying strength of the American economy and argued the recent spate of weak data on business activity is more likely to prove fleeting than lasting.

Even the Fed's two most dovish policymakers - the presidents of the St. Louis and Minneapolis regional banks - say they are not ready to agitate for the central bank to start reversing three years of rate increases.

On Friday one of the bank's centrists, Randal Quarles, the Fed Board of Governor's Vice Chair for Supervision, offered an optimistic view of the U.S. economy and said more rate increases may be needed if recent positive trends in productivity and investment continue.

Quarles is the latest in a series of policymakers insisting the Fed has an option to raise rates even as markets increasingly regard such a move as unlikely. The latest monthly jobs report showed a sharp slowdown in hiring, and recent data shows factory activity, business and consumer confidence and inflation have all weakened.

Indeed, prices on futures contracts tied to the Fed's policy rate on Friday reflected bets the central bank will need to reduce interest rates by September.

Speaking in New York, Quarles said he is inclined to dismiss the recent data as "a bit odd" and "inconsistent" with underlying strength, wage gains that should be boosting households, and a rise in productivity he feels could be "persistent" and lead to stronger growth down the road.

But it wasn't just Quarles, who has long tended to be on the more hawkish end of the Fed's policy spectrum.

Even Minneapolis Federal Reserve Bank President Neel Kashkari, one of the biggest opponents of rate hikes at the central bank, told Reuters on Friday that it is "premature" to think about a cutting rates in response to economic data and market indicators.

Also on Friday, Dallas Federal Reserve President Robert Kaplan said bond markets are pointing to skepticism about future economic growth. But some economic data in the first quarter was distorted by a partial U.S. government shutdown and consumers are in good shape, he said.

Perhaps most telling are remarks by the influential chief of the New York Fed, John Williams, who on Thursday said the U.S. economy is in "a very good place" and described the likelihood of a recession in 2019 or 2020 as "not elevated."

"I'm not as worried about a recession as some of my colleagues in the private sector," Williams said. "I still see the probability of a recession this year or next year as being not elevated relative to any year."

Louis Fed President James Bullard late Thursday also said it was premature to discuss any rate cut and felt the economy would likely rebound.

The Fed last week kept its target range for short-term rates at 2.25% to 2.5%, and projections showed most policymakers do not see any rate hikes this year, a downgrade from December when the median forecast was for rates to rise to 2.9%.

That downgrade was followed days later by a market phenomenon known as a yield curve inversion, where short-term rates exceed long-term rates, a pattern in the bond market that historically precedes a recession.

Policymakers have been keen to avoid the perception becoming reality, which may explain some of their pushback in recent days.

With the unemployment rate at 3.8% and the economy still growing faster than potential even as it slows, they also are reluctant to abandon the idea that inflation and wages will eventually perk up.

The Federal Reserve took a sharply less aggressive policy posture on Wednesday, signaling it will not hike interest rates this year amid a slowing economy and announcing a plan to end its balance sheet reduction program by September.

The U.S. central bank reiterated its pledge to be "patient" on monetary policy, and said it would start slowing the reduction of its holdings of Treasury bonds in May, lowering its monthly cap to USD 15 bn from USD 30 bn.

All told, the combined announcements mean that, after tightening monetary policy with two levers at once over the past year, the Fed is now pausing on both fronts to adjust to weaker global growth and a somewhat weaker outlook for the U.S. economy.

"It may be some time before the outlook for jobs and inflation calls clearly for a change in policy ," Fed Chairman Jerome Powell said in a press conference following the end of a two-day policy meeting. "'Patient' means that we see no need to rush to judgment."

Updated economic forecasts released at the end of the meeting also showed policymakers had abandoned projections for any rate increases this year, and see just one rate hike next year.

After the announcement, fed funds futures contracts began pricing in a better-than-even chance of a rate cut by next year.

Powell pushed back on that view, saying the U.S. economy is in a "good place" and that the outlook is "positive."

Still, he said, there are ongoing risks, including those related to Britain's exit from the European Union, U.S. trade talks with China, and even the outlook for the U.S. economy, which he said the Fed is watching closely.

"The data are not currently sending a signal that we need to move in one direction or another, in my view," he said. "It's a great time for us to be patient."

The new economic projections released on Wednesday showed weakening on all fronts compared to the forecasts from December, with unemployment expected to be slightly higher this year, inflation edging down, and economic growth lower as well.

"Growth of economic activity has slowed from its solid rate in the fourth quarter," the Fed said in a policy statement. "Recent indicators point to slower growth of household spending and business fixed investment in the first quarter ... overall inflation has declined."

Nonetheless, the Fed's rate-setting committee said it viewed "sustained" growth as the most likely outcome.

Fed policymakers project GDP growth to slow to 2.1% this year from the previous forecast of 2.3%, while the unemployment rate is forecast at 3.7%, slightly higher than the December projection.

Inflation for the year is now seen at 1.8%, compared to the Fed's forecast in December of 1.9%.

The new projections amounted to a wholesale downgrade of the Fed's outlook, with at least nine of its 17 policymakers lowering their expected rate path and collectively shaving a full half of a percentage point off the expected fed funds rate at the end of this year.

Bull sentiment increases. Monthly RSI diverged on the new trend low and a bull hammer forms for March. Daily RSI is biased up while the daily cloud top and 1.1420 resistance were pierced. We lift our long entry to 1.1390. Once long we expect a rally above the 200-day moving average.

The U.S. Federal Reserve is expected to hold interest rates steady today, cut the number of hikes projected for the rest of the year, and release long-awaited details of a plan to end the monthly reduction of its massive balance sheet.

The U.S. central bank since early this year has signaled a "patient" approach to increasing borrowing costs, drawing an end to a gradual, three-year cycle of monetary tightening marked by nine rate hikes, including seven during the 2017-2018 period.

Investors now put a 75% probability on the likelihood the Fed won't raise its overnight benchmark interest rate, or federal funds rate, any more this year.

New quarterly economic and rate projections to be released with the latest Fed policy statement will show how closely policymakers align with that view. The Fed's December projection called for two hikes this year, but that is widely expected to be cut to a single increase at the conclusion of the two-day policy meeting on Wednesday.

It would take a downward move by seven policymakers to bring the median expected number of hikes to zero for the year, a full half-percentage-point change that has happened only once since the Fed began making its "dot plot" of projections public in 2012.

The more intense focus among investors may be on the balance sheet, and the Fed's plans to stop reducing its holdings of Treasury bonds and mortgage-backed securities each month by as much as USD 50 billion.

Details of that plan are also expected to be released on Wednesday, providing investors with a sense of how much longer the drawdown will continue, and what will likely be left in the Fed's portfolio of assets when it stops.

EUR/USD bulls look set to test the key 1.1374 Fibonacci level, a 50% retrace of the 1.1570 to 1.1177 2018 slide, after spot registered the biggest one-week rise since November 2018. We are looking to get long on dips to 1.1310.

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