Central Banks Playing Pin the Tail on the Inflation Donkey
Market Analysis for Week Number 03 2024
DERBYSHIRE UK, Jan 17, 2024, Week 3. Welcome to Wednesday. As we gear up for a busy few days, keep a close eye on Wednesday's key data releases: US Retail Sales and Central Bank officials' speeches, Eurozone CPI, and UK Inflation Rate, all pivotal for currency movements. On Thursday, US Initial Jobless Claims, ECB President Lagarde's speech, and Japan's Inflation Rate are on the docket. Geopolitical tensions and supply chain disruptions, alongside inflation dynamics, are significant narratives influencing the market. Additionally, economic slowdown and growth divergence, especially between the US and China, alongside China's policy decisions, are critical for global currency impacts. In currency pairs, we're seeing a slightly bullish DXY and USD/CAD, while EUR/USD and GBP/USD are slightly bearish. USD/CHF shows a bullish trend, with USD/JPY even more so. In contrast, AUD/USD and NZD/USD are leaning bearish.
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Key Events:
Wednesday, January 17, 2024:
US Retail Sales (8:30 AM EST): Measures total retail sales in the US. A higher-than-expected reading could strengthen the USD, while a lower reading could weaken it.
US Fed Officials' Speeches: Several Fed officials (Waller, Barr, Bowman, Woods) speak throughout the day. Hawkish comments could strengthen the USD, while dovish comments could weaken it.
Eurozone CPI Final (10:00 AM EST): Final reading of the Eurozone consumer price index. A higher-than-expected reading could strengthen the EUR, while a lower reading could weaken it.
UK Inflation Rate (7:00 AM EST): Measures consumer price inflation in the UK. A higher-than-expected reading could strengthen the GBP, while a lower reading could weaken it.
Thursday, January 18, 2024:
US Initial Jobless Claims (8:30 AM EST): Measures the number of new claims for unemployment benefits in the US. A higher-than-expected reading could weaken the USD, while a lower reading could strengthen it.
Eurozone ECB President Lagarde Speech (1:45 PM EST): Lagarde's comments on the Eurozone economy and monetary policy could impact the EUR.
Japan Inflation Rate (4:00 AM EST): Measures consumer price inflation in Japan. A higher-than-expected reading could weaken the JPY, while a lower reading could strengthen it.
Key Narratives
Central Bank Decisions & Divergence: Hawkish vs. dovish stances by major central banks, particularly the Fed and ECB, are driving currency divergence. Watch for policy announcements and economic data impacting rate hike trajectories.
Geopolitical Tensions & Supply Chain Disruptions: Red Sea crisis, regional conflicts, and global trade disruptions can trigger volatility and commodity price fluctuations, impacting USD, EUR, and emerging market currencies.
Inflation Dynamics & Data Surprises: Easing but persistent inflation remains a key concern. Unexpected data, especially in the US and Eurozone, can influence rate hike expectations and currency valuations.
Economic Slowdown & Growth Divergence: Weakening economic data and growth divergence between major economies, like the US and China, can create risk aversion and impact currency flows and valuations.
China's Policy & Global Impact: China's economic policies, including potential stimulus measures and its stance on US-China relations, have ripple effects on global trade and currencies like the USD and AUD.
Currency Pairs Snapshot
DXY: Slightly bullish, as the dollar index recently topped 103.3, its highest in nearly a month, compared to a more stable but slightly increasing trend over the past six months, driven by scaled-back expectations of interest rate cuts from the Federal Reserve, robust economic activity, and a gradual reduction in inflation.
USD/CAD: Slightly bullish, with the Canadian dollar depreciating past 1.345 per USD, reaching a one-month low, compared to a relatively stable USD/CAD rate over the past six months, influenced by the stronger USD amid Federal Reserve policy expectations and Canada's unexpected rise in inflation, which has pressured the Bank of Canada to maintain a cautious stance on economic growth and interest rates.
EUR/USD: Slightly bearish, as the Euro slipped below $1.09, hitting its lowest point since mid-December, reflecting the recent general dollar strength and the hawkish stance of ECB officials on interest rate cuts, contrasting with the previous six months where the Euro showed more resilience against the USD amid varied ECB policies and inflation expectations.
GBP/USD: Slightly bearish, with the British Pound dipping below $1.27 due to data indicating a slowdown in the UK labour market, increasing the likelihood of interest rate cuts by the Bank of England, compared to a more stable GBP/USD rate over the previous six months, which had been influenced by different economic indicators including inflation rates and policy decisions from the Bank of England.
USD/CHF: Slightly bullish, as the Swiss Franc held steady around 0.85 per USD, close to its 12-year high, compared to a more consistent strength over the past six months, influenced by the Swiss National Bank's hawkish monetary policy, persistent foreign exchange selling, and a higher-than-expected inflation rate in Switzerland, contrasting with the Federal Reserve's steady approach and potential rate cuts in the future.
USD/JPY: Bullish, with the Japanese Yen weakening past 146 per dollar, approaching one-month lows, in contrast to its sharper rally at the end of 2023, driven by easing domestic inflation and flattening producer prices in Japan, reducing pressure on the Bank of Japan to raise interest rates, and influenced by the rebound in the US dollar as traders adjust expectations regarding the Federal Reserve's rate cuts.
AUD/USD: Bearish, as the Australian dollar depreciated past $0.662, reaching its lowest levels in over a month, influenced by weak economic data and expectations that domestic interest rates have likely peaked, contrasting with the last six months where the AUD showed more resilience against the USD, but now faces pressure from a rebound in the US dollar and a scaled-back outlook for early interest rate cuts from the Federal Reserve.
NZD/USD: Bearish, with the New Zealand dollar sliding past $0.617 to its lowest levels in over a month, driven by growing expectations that domestic interest rates have peaked and market pricing in significant easing, a shift from the previous six months where the NZD was more stable, now compounded by external pressure from a rebounding US dollar as traders adjust their Federal Reserve rate cut expectations.
Gavin Pearson
Retail trader since 2008
Specialises in forex G7 currencies
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