Can EUR Hold Its Hawkish Gains? Inflation and Lagarde's Words Hold the Key
Market Analysis for Week Number 03 2024
DERBYSHIRE UK, Jan 16, 2024, Week 3. Welcome to Tuesday. Today has Canada’s Inflation Rate and Eurozone Consumer Inflation Expectations, pivotal for CAD and EUR respectively. Mid-week brings us US Retail Sales and a series of Fed Officials’ speeches, which could significantly sway the USD. Eurozone inflation data and ECB President Lagarde's speech are also on the radar. Come Thursday and Friday, US data, including Jobless Claims and Home Sales, will be in the spotlight. In terms of broader narratives, central bank policy divergence, particularly between the Fed and ECB, remains a critical theme. Inflation continues to be a major influencer, alongside the uncertain trajectory of the US Dollar. Oil markets and geopolitical tensions add extra layers of complexity.
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Key Events
Tuesday, January 16, 2024:
Canada Inflation Rate (YoY & Core YoY): Higher-than-expected inflation could strengthen CAD as BoC may consider further rate hikes. Lower inflation could weaken CAD.
Eurozone Consumer Inflation Expectations (NOV): Upward revisions could raise ECB hawkishness and strengthen EUR. Downgrades could weaken EUR.
Wednesday, January 17, 2024:
US Retail Sales (MoM & Ex Autos MoM): Strong readings could support USD by signalling economic resilience. Weak data could weaken USD.
US Fed Officials' Speeches (Waller, Barr, Bowman, Woods): Hawkish commentary could strengthen USD. Dovish remarks could weaken USD.
Eurozone Inflation Rate (YoY & Core YoY, Final DEC): Confirmation of high inflation could solidify ECB tightening expectations and strengthen EUR. Lower-than-expected readings could weaken EUR.
Thursday, January 18, 2024:
US Initial Jobless Claims (JAN/13): Lower claims could strengthen USD by suggesting a strong labour market. Higher claims could weaken USD.
Eurozone ECB President Lagarde Speech: Hawkish stance could strengthen EUR. Dovish tone could weaken EUR.
Friday, January 19, 2024:
US Existing Home Sales (MoM & YoY DEC): Strong data could support USD by indicating resilience in the housing market. Weak numbers could weaken USD.
Eurozone ECB President Lagarde Speech: Repetition of Thursday's remarks.
Key Narratives
Central Bank Policy Divergence: Global central banks are charting different courses, with the Fed potentially pausing rate hikes earlier than the ECB. This divergence could trigger major currency realignments, particularly impacting USD/EUR and CHF/EUR.
Inflation Tug-of-War: Inflation remains a hot potato, pressuring central banks to balance tightening against economic headwinds. Data surprises that deviate from expectations could spark volatility and shift currency valuations.
US Dollar's Uncertain Trajectory: Despite recent strength, the dollar's long-term direction hinges on the Fed's eventual easing cycle. Watch key US data releases and Fed rhetoric for clues on the timing and pace of rate cuts.
Oil Markets and Commodity Woes: Crude price fluctuations directly impact major exporters like Canada (CAD) and Russia (RUB). Broader commodity headwinds could also influence risk appetite and currency flows.
Geopolitical Wildcards: Unexpected events like regional conflicts or trade disputes can inject short-term volatility into the market. Stay alert to geopolitical flashpoints and their potential ripple effects on specific currencies.
Currency Snapshot
DXY (US Dollar Index):
Six-Month: Mildly bullish, supported by hawkish Fed tightening expectations and safe-haven demand during risk-off periods.
Six-Day: Bearish, pressured by dovish Fed commentary and speculation of an earlier pivot to easing. Watch key US data and Fed rhetoric for further direction.
USD/CAD:
Six-Month: Slightly bearish, weighed down by concerns about Canada's economic slowdown and oil price volatility.
Six-Day: Mixed, fluctuating with oil price swings and broader risk sentiment. Strong Canadian retail sales data could offer temporary support.
EUR/USD:
Six-Month: Range-bound, awaiting clear signals on ECB's policy path. Eurozone sentiment has improved, but rate cut expectations remain high.
Six-Day: Slightly bullish, benefiting from weaker dollar and hawkish ECB remarks. Continued economic data and central bank communication will be crucial.
GBP/USD:
Six-Month: Mixed, balancing BoE's cautious easing approach with UK's potential fiscal stimulus. Correlation with equities may play a key role.
Six-Day: Bearish, pressured by risk-off sentiment and weaker UK economic data. BoE Governor Bailey's upcoming testimony could provide direction.
USD/CHF:
Six-Month: Neutral, with SNB's policy shift away from active FX intervention creating uncertainty.
Six-Day: Bearish, mirroring broader dollar weakness and potential SNB intervention to curb CHF strength. Keep an eye on inflation data and global risk trends.
USD/JPY:
Six-Month: Bearish, as BoJ's ultra-dovish stance diverges from global tightening trend. Potential rate hike in April might offer temporary bullish correction.
Six-Day: Mixed, fluctuating with market speculation and inconsistent economic data. BoJ's language and global factors will likely determine near-term direction.
AUD/USD and NZD/USD:
Six-Month: Both slightly bearish, vulnerable to slowing Chinese growth and commodity price pressures.
Six-Day: Mixed, responding to individual economic data releases and broader risk sentiment. Watch for RBA/RBNZ policy updates and key regional economic indicators.
Macroeconomic Snapshot
UNITED-STATES (USD): The US economy demonstrated resilience with a steady Federal Reserve funds rate and robust GDP growth of 4.9% in Q3 2023. Despite a moderate slowdown in job gains, the unemployment rate remained low, and consumer spending, though decelerated, was substantial. Inflation, while eased, continues to be a concern. The Federal Reserve's inclination towards rate cuts in 2024 hints at a cautious approach towards economic growth, potentially impacting the strength of the USD. Trading Economics forecasts a slight decline in GDP growth and inflation in 2024, which could lead to a more dovish monetary policy, influencing the USD's value.
CANADA (CAD): Canada's economic performance has been mixed, with a contraction in Q3 2023 GDP, reflecting the impact of higher interest rates. The Bank of Canada’s steady rate indicates a cautious approach towards economic growth and inflation control. This economic landscape has likely influenced the Canadian Dollar's performance, with potential for further impact as Trading Economics forecasts a continuation of modest economic growth and a gradual decrease in interest rates in the long term.
EURO-AREA (EUR): The Euro-Area experienced a slight contraction in its economy in Q3 2023. Despite this, inflation rates have risen, prompting the ECB to maintain high-interest rates. This economic scenario presents a mixed impact on the Euro, with potential inflationary pressures counterbalanced by economic contraction. Trading Economics forecasts suggest a gradual improvement in GDP growth and a decrease in inflation, which might lead to a more stable Euro in the long term.
UNITED-KINGDOM (GBP): The UK economy showed signs of strain with a slight contraction in Q3 2023 and a high inflation rate. The Bank of England's decision to maintain the interest rate suggests a focus on combating inflation, despite economic challenges. This situation has likely impacted the Pound, balancing inflation concerns against economic contraction. Trading Economics forecasts a reduction in both GDP growth and inflation rate in the coming years, which could lead to a more balanced monetary policy and potentially stabilise the GBP.
SWITZERLAND (CHF): Switzerland's economy exhibited modest growth in Q3 2023, with the Swiss National Bank keeping its policy rate steady. The low inflation rate indicates a stable economic environment. These factors likely supported the strength of the Swiss Franc. Trading Economics forecasts a continued trend of modest growth and low inflation, which could maintain the CHF's stability in the global market.
JAPAN (JPY): Japan's economy contracted in Q3 2023, with the Bank of Japan maintaining its negative interest rate policy. This indicates a continued accommodative stance to support economic growth. The Japanese Yen's performance is influenced by these factors, along with moderate inflation rates. Trading Economics forecasts a modest recovery in GDP growth and inflation rate, which could impact the JPY's future trajectory, potentially leading to a cautious monetary policy shift.
AUSTRALIA (AUD): Australia's economy saw slower growth in Q3 2023, with the Reserve Bank of Australia holding its rates. This reflects a cautious approach towards balancing growth and inflation. The Australian Dollar's performance is influenced by these economic conditions. Trading Economics forecasts a continued trend of moderate growth and easing inflation, which might lead to a more balanced economic outlook and impact the AUD's performance.
NEW-ZEALAND (NZD): New Zealand's economy contracted slightly in Q3 2023, with the Reserve Bank of New Zealand keeping rates steady. This suggests a focus on managing inflation and supporting economic stability. The New Zealand Dollar's value is influenced by these economic conditions. Trading Economics forecasts a trend of moderate economic growth and inflation, which might lead to a stable monetary policy and impact the NZD's performance in the global market.
Gavin Pearson
Retail trader since 2008
Specialises in forex G7 currencies
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