Canadian Dollar Navigates Mixed Economic Landscape Ahead of BoC Decision
Market Analysis for Week Number 10 2024
DERBYSHIRE UK, Mar 06, 2024, Week 10. Welcome to Wednesday. The dollar faces headwinds as the economy shows signs of slowing growth, with key PMI data, ADP employment figures, and Fed Chair Powell's testimony in focus. Meanwhile, the Canadian dollar grapples with mixed economic signals ahead of the Bank of Canada's rate decision. The euro remains steady as investors await the ECB's policy meeting on Thursday, while the UK economy stabilises, supported by positive housing market data.
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US Dollar Faces Headwinds Amid Slowing Economic Growth
The United States economy is expected to experience steady but slowing growth in March 2024, with GDP projected to expand around 2% in Q1 2024, down from 3.2% in the previous quarter. While job growth rebounded in January and the unemployment rate held steady at 3.7%, inflation remains a concern, decreasing only slightly to 3.1% annually. Consumer spending is robust, but sectors like retail and vehicle sales dipped in January, and manufacturing activity slowed due to winter storms.
Forex traders should closely monitor several upcoming economic events that could impact the value of the US dollar. On Tuesday, March 5, the Services PMI and ISM Non-Manufacturing PMI will provide insights into the health of the services sector. On Wednesday, March 6, the ADP Nonfarm Employment Change and Fed Chair Powell's testimony could offer clues about the labour market and future monetary policy decisions. The highly anticipated Nonfarm Payrolls and Unemployment Rate data will be released on Friday, March 8.
The dollar index depreciated to 103.6 on Tuesday, the lowest level in about a month, as lower-than-expected economic data strengthened the case for the Fed to cut rates this year. The odds for a 25bps rate cut in March currently stand at around 56%. The US dollar is expected to trade at 104.43 by the end of the quarter and 105.47 in 12 months, according to Trading Economics global macro models and analysts' expectations.
Overall, while the US economy is expected to continue growing, the slowing pace of expansion and potential for rate cuts could put downward pressure on the US dollar in the short term. Traders should remain vigilant and react to key economic data releases and central bank decisions in the coming weeks.
Canadian Dollar Faces Headwinds Despite Resilient Economy
Canada's economy has shown signs of resilience in recent months, with GDP expanding by an annualised 1% in Q4 2023, beating expectations of 0.8%. Exports rebounded by 1.4%, driven by increased crude oil and bitumen sales. The job market also surprised to the upside, with the unemployment rate falling to 5.7% in January and 37,300 net new jobs added. Inflation slowed to 2.9%, the lowest since June 2023. However, high interest rates are starting to weigh on growth, with business investment contracting for the sixth time in seven quarters and household spending edging up only 0.2%.
Forex traders should closely monitor the Bank of Canada's interest rate decision on Wednesday, March 6th. The central bank is widely expected to keep rates on hold at 5.00% amid the mixed economic data. Upcoming releases from the U.S. later in the week, including the ISM Non-Manufacturing PMI, ADP employment report, and nonfarm payrolls, could also impact the loonie's trajectory. If U.S. data disappoints, it could boost expectations for Fed rate cuts and weaken the U.S. dollar, providing support for the Canadian dollar.
The Canadian dollar has rebounded from a near 3-month low of 1.36 per USD touched on February 28th, with the USDCAD trading at 1.3598 on Tuesday, March 5th. Analysts expect the currency pair to end the quarter around 1.36 and rise to 1.37 in 12 months' time. While the recent GDP figures have given the BoC some breathing room, the slowing economy suggests rate cuts may be on the horizon later this year. This, coupled with lingering concerns around global growth and oil demand, could cap gains for the commodity-sensitive loonie in the near-term.
Euro Stagnation Persists as ECB Decision Looms
The Euro Area economy continues to face significant challenges, with GDP growth stagnating at 0% in Q4 2023 and inflation remaining above the European Central Bank's (ECB) target. Despite a slight easing of inflationary pressures in February, with consumer prices rising 2.6% year-over-year, core inflation remains stubbornly high at 3.1%. Retail sales have also declined for 15 consecutive months, indicating that high prices are weighing on household demand. The economic outlook for the near term remains subdued, with GDP forecast to expand by a modest 0.3% quarter-over-quarter in Q1 2024. Although the job market has been a bright spot, with unemployment reaching a record low of 6.4% in January, the risk of recession persists until inflationary pressures fully subside.
Investors are now focused on the upcoming ECB monetary policy meeting on Thursday, March 7, where policymakers are expected to maintain interest rates at record highs. Traders will closely scrutinise updated economic projections and any indications from President Christine Lagarde regarding the timing of potential declines in borrowing costs. Other key economic events this week include the release of PMI data for the UK and US on Tuesday, the Bank of Canada's interest rate decision on Wednesday, and the US Nonfarm Payrolls and Unemployment Rate on Friday, March 8.
The euro has recently surged to its highest level since February 1st, trading at $1.0854 on Tuesday, March 5, as investors anticipate the ECB's policy outlook. The EURUSD is expected to trade at 1.08 by the end of the quarter, according to analysts' expectations. European stocks, however, fell on Tuesday, with the STOXX 50 and STOXX 600 declining by 0.5% and 0.3%, respectively, as China's economic transformation plans failed to excite investors amidst sluggish growth.
UK Economy Stabilising, Pound Holds Steady Amid Key Events
The United Kingdom's economy is showing signs of stabilisation in early 2024 after a challenging 2023. Recent data indicates modest improvements in GDP, inflation, unemployment, and retail sales. GDP contracted by a milder 0.3% in Q4 2023 compared to 0.1% in Q3, while inflation held at 4% in January, near a two-year low. The jobless rate fell to 3.8% in Q4, and retail sales rebounded 3.4% month-over-month in January.
Looking ahead, GDP growth is expected to pick up gradually in 2024, with inflation continuing to moderate towards the 2% target. Unemployment may edge higher but remain historically low, and consumer spending is forecast to recover modestly. However, uncertainties persist around energy costs, interest rates, and global growth. The Bank of England will likely maintain a tight monetary stance to ensure inflation sustainably returns to target.
Key economic events this week, including the UK Budget statement on Wednesday, March 6, Fed Chair Powell's congressional testimony, and the ECB's policy decision on Thursday, March 7, will be closely watched by investors for insights into the monetary and fiscal policy outlook. A slew of PMI data and the crucial US jobs report on Friday, March 8, will also be in focus.
The British pound held above $1.265, supported by positive housing market data. Nationwide reported a 1.2% year-over-year rise in house prices for February, the first annual increase in over a year. Bank of England figures also showed stronger than anticipated growth in mortgage approvals and consumer lending. Markets currently expect the BoE to begin cutting rates in August, with the Fed and ECB anticipated to follow suit in June.
In summary, while the UK economy appears to be stabilising, the path forward remains bumpy. The pound's near-term trajectory will be influenced by domestic and global economic developments, as well as the monetary policy stances of major central banks.
Gavin Pearson
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