OIL PRODUCTS: Oil Products End of Day Summary: Cracks Rise

St Louis Fed President Musalem (2025 FOMC voter, hawk) reiterates his scenario-based outlook for monetary policy amid tariff/immigration uncertainty in a speech Wednesday, a viewpoint he also expressed in February. Overall he sees increasing risks of inflation stalling above 2%, with both initial and second-round tariff impacts key to the outlook, specifically mentioning risks of having to hold rates for longer or raise them, and advocates for the Fed maintaining what he calls a "patient approach".

• "If the economy remains strong and inflation remains above our target, then I believe the current, modestly restrictive policy will remain appropriate until there is confidence inflation is converging to 2%. If the labor market remains resilient and the second-round effects from tariffs become evident, or if medium- to longer-term inflation expectations begin to increase actual inflation or its persistence, then modestly restrictive policy will be appropriate for longer or a more restrictive policy may need to be considered. If labor market conditions were to deteriorate, with inflation stable or declining toward target and inflation expectations anchored at a level consistent with 2% inflation, policy could be eased further. At this juncture, a patient approach, involving careful assessment of incoming information, the outlook and risks, will help us as we seek maximum employment, price stability and a durable economic expansion."
• He notes "The risks that inflation will stall above 2% or move higher in the near term appear to have increased" and "it is possible and actually probable that inflation will be higher than we had expected. 3 to 6 months ago" even as growth looks weaker. His overall stance appears to be that while balancing the employment/inflation mandates is required, he sees keeping inflation expectations contained as the priority. "A scenario involving labor market softening and above-target or rising inflation would present a challenging environment for monetary policy. This scenario could occur for a variety of reasons, though higher tariffs and reduced immigration have been widely discussed and thought by many as likely to raise prices and soften aggregate demand and employment, at least in the near term. Higher tariffs potentially involve both direct and indirect effects on economic activity, the labor market and inflation, depending on how tariffs are implemented and any retaliation by trading partners."
• In Q&A he says: "that presents some challenges for monetary policy, because you have both sides of the mandate working in opposite directions...so what I think we ought to do in those situations is adopt a balanced approach, which is setting the interest rate with a few things in mind. And one of those things is understanding how far off you are from your employment side of the target or the growth side of the target, and how far off you are relative to the inflation side of the target, and balance that...that balanced approach works well when inflation expectations are stable and anchored and consistent with 2% inflation. If inflation expectations are threatening to become unanchored or becoming an anchor in the long term, then the balanced approach may not work. And at that point, it is my view that we would have to probably lean into the inflation side of our dual mandate to make sure inflation expectations and inflation remain anchored. Ultimately, we can't generate at full employment or maximum employment if inflation and inflation expectations are not anchored. So that's the ultimate objective."

• RES 4: 1.3175 High Oct 4 2024  
• RES 3: 1.3119 76.4% retracement of the Sep 26 ‘24 - Jan 13 bear leg
• RES 2: 1.3048 High Nov 6 ‘24
• RES 1: 1.3015 High Mar 20 and the bull trigger  
• PRICE: 1.2897 @ 16:45 GMT Mar 26 
• SUP 1: 1.2875 Low Mar 26     
• SUP 2: 1.2869 20-day EMA
• SUP 3: 1.2731 50-day EMA and a short-term pivot support  
• SUP 4: 1.2556 Low Feb 28      

The trend structure in GBPUSD remains bullish and the latest shallow pullback appears corrective. Moving average studies are in a bull-mode position and this highlights a dominant uptrend. A resumption of gains would pave the way for a climb towards 1.3048, the Nov 6 2024 high. Initial firm support to watch is 1.2869, the 20-day EMA. Clearance of this level would signal scope for a deeper retracement towards the 50-day EMA, at 1.2731.                  

• Headlines suggesting that President Trump is preparing a statement on automotive import tariffs for Wednesday afternoon have weighed on major equity indices, in turn boosting the USD index to a three-week high. Specific headlines regarding the EU suggesting that its top trade negotiator expects President Trump to hit the bloc with tariffs of about 20% next week have also dampened sentiment for the single currency.
• As such, EURUSD has slipped further below 1.0800, and is notably tracking below the 20-day exponential moving average for the first time since March 03. This threatens a deeper pullback for the pair, potentially towards more significant support at 1.0631, a key short-term pivot level.
• In similar vein, GBPUSD trades on the backfoot and is below 1.29, however, sterling’s underperformance is mainly due to a softer set of inflation data from the UK, that prompted an early shunt lower for cable. The Spring Statement from Chancellor Reeves had little effect overall, as GBPUSD consolidates 0.42% losses as we approach the APAC crossover.
• Price action narrows the gap to firm support at 1.2869, the 20-day EMA. A sustained clearance of this level would signal scope for a deeper retracement towards the 50-day EMA, at 1.2731.
• AUDJPY remains higher on the session, but the latest equity weakness is helping its key 50-day EMA resistance cap the topside for the cross. Today’s high of 95.19 matched closely with the average, which has proved significant in recent months, having not closed above it since January.
• The firmer dollar theme is trumping the softer sentiment for equities, emphasised by USDJPY rising 0.42% to 150.55. The focus continues to be on 150.95, which represents both the recovery high and the 50-day EMA, a break above which would be the latest counter-trend signal and could signal scope for a stronger rally.
• US final GDP, weekly jobless claims and pending home sales highlight a relatively light economic calendar on Thursday.