Critical Data On Deck With Power To Move Markets
Market Analysis for Week Number 09 2024
DERBYSHIRE UK, Feb 22, 2024, Week 9. Welcome to Monday. Welcome to the last week of February 2024. This week we have several key economic data releases and central bank decisions that could impact currency markets. On Wednesday, New Zealand sees the RBNZ rate decision and monetary policy statement, which will give insight into the central bank's thinking amid easing inflation. The Australian dollar also gets February CPI data, a key gauge of price pressures. Thursday has Canadian GDP and U.S. PCE inflation on tap. Both will shape rate hike expectations for the BoC and Fed. We also see Swiss GDP, Eurozone CPI and retail sales. Friday rounds out the week with Chinese PMIs and U.S. ISM manufacturing. These will provide an update on two of the world's largest economies.
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US Dollar - Steady Amidst Cautious Optimism
The US dollar index has stabilised near 104, after dipping to 103.4, as hawkish Fed remarks indicate rates may remain elevated for longer to ensure disinflation continues. Upbeat economic data, including lower jobless claims and a rebound in manufacturing, also support dollar strength. However, an easing of inflation to 3.1% and slight growth deceleration to 3.3% GDP suggest tight conditions are cooling the economy.
Going forward, the dollar may strengthen if the Fed maintains higher rates to further curb inflation. But if price rises continue moderating and growth slows substantially, the central bank could cut rates, weighing on the dollar. Much depends on upcoming inflation and jobs reports confirming a soft landing. Overall the currency looks steady amidst cautious optimism around the economic outlook.
Canadian Dollar: Loonie Faces Headwinds From Dovish Central Bank Shift
The Canadian dollar fell past 1.35 per USD in late February, indicating a weakening outlook. This was driven by growing expectations of imminent rate cuts by the Bank of Canada to support the slowing economy. Inflation dropped to 2.9% in January, below forecasts and the central bank's target range, reducing pressure for further hikes. Meanwhile policymakers emphasised the dampening impact of high rates on demand. With inflation easing faster than expected, the BoC appears poised to pivot to rate cuts as early as Q2 2024 to cushion growth.
Over the coming months, the loonie will likely remain on a weakening trajectory. Persistent economic sluggishness and below-target inflation will encourage further dovish signalling and eventual cuts from the BoC. Meanwhile demand concerns weighing on oil will limit upside for the commodity-linked currency. The path of Fed policy and broader USD strength will also influence, but easier Canadian policy supports a weaker loonie trend.
EUR - Currency Outlook Hinges on ECB Policy and Economic Resilience
The euro has appreciated over the past two weeks, rising from 1.0823 to 1.0817 against the dollar. This is primarily attributed to investors tempering expectations for ECB interest rate cuts in 2024 - from as many as seven cuts anticipated earlier to fewer than four now - after recent data showed a slower pace of Eurozone business contraction. The shift led to reduced bets on rate cuts starting as early as June.
Going forward, the euro's value will depend significantly on the ECB's policy stance as it balances inflation control with recession risks. If data continues indicating easing price pressures and the central bank opens the door to rate cuts, the euro could decline. However, if the bloc shows economic resilience despite challenges, limiting the need for stimulus, the currency could see further gains. Geopolitics like EU sanctions on Chinese companies aiding Russia's war effort could also impact currency movements if they trigger retaliatory actions.
Pound Faces Uncertainty Amid Mixed Economic Signals
The Pound has seen modest gains over the past two weeks, rising from 1.2659 to 1.2669 against the dollar. This comes as UK economic data presents a mixed picture. On one hand, February PMI figures indicated faster private sector growth than expected, driven by the services sector. However, consumer sentiment declined on worries about personal finances and the economy.
Looking ahead, conflicting indicators make Sterling's path uncertain. Inflation remains high at 4%, limiting the Bank of England's scope to cut rates. But higher rates also risk economic contraction, with GDP having fallen 0.3% in Q4 2023. Meanwhile, robust wage growth threatens to stoke inflation further. Geopolitical tensions like the Red Sea dispute may also disrupt UK factory supplies.
With mixed signals, the Pound's gains seem fragile. We expect it to trade down to 1.25 against the dollar by the end of Q1 2024. In 12 months, it may fall further to 1.23 as economic weakness and inflation linger while global growth recovers. Though the BoE wants to avoid recession, its policy room is constrained. Until data consistently improves, risks remain tilted to the downside for Sterling.
SWISS FRANC - Steady Against Dollar As Diverging Policy Outlooks Offset
The Swiss franc has remained steady against the US dollar over the past two weeks, hovering near 0.88 per USD. This stability comes despite contrasting macroeconomic situations and policy outlooks in Switzerland and the United States.
In Switzerland, inflation fell to 1.3% in January, remaining below the central bank's 2% target for over half a year. This has increased expectations that the Swiss National Bank may cut interest rates in coming months to support growth. Meanwhile in the US, inflation remains stubbornly high, leading markets to expect further Fed rate hikes. These opposing stances would typically lead to franc depreciation, but this has been offset by other factors.
Over the next few months, the franc is expected to hold steady or depreciate slightly against the dollar. Diverging monetary policies will continue to weigh on the franc, as will Switzerland's economic slowdown. However, safe haven flows amid global uncertainty could limit franc losses. The currency is forecast to trade around 0.90 per USD in a year.
JPY - Currency Weakness Amid Economic Contraction and Dovish Central Bank Policy
The Japanese yen has depreciated over the past 14 days, falling from around 150 per dollar to current levels near 154. This weakness comes as Japan unexpectedly fell into a technical recession in Q4 2023, with GDP contracting 0.1% quarter-over-quarter. This economic deterioration, along with still-high inflation of 2.6%, reduces the likelihood of the Bank of Japan shifting away from its ultra-dovish monetary policy anytime soon. The BoJ is expected to maintain its negative interest rate policy to support growth.
In the coming months, additional yen depreciation seems likely amid a stagnating domestic economy and steady monetary policy divergence between the BoJ and more hawkish global central banks. However, the currency is already trading near 24-year lows, so substantial further falls may be unlikely without a significant negative catalyst. Intervention also remains a possibility if weakness becomes extreme. But the overriding trend still points to yen depreciation as policy and growth differentials continue favoring overseas currencies.
AUSTRALIAN DOLLAR - Supported by Dovish RBA and Improving Economic Outlook
The Australian dollar has appreciated over the past 14 days, rising from $0.6553 to $0.6565 against the US dollar. This strengthening has been driven by a combination of factors.
Firstly, the latest RBA meeting minutes indicate the central bank is adopting a more dovish tone and openness to interest rate cuts later this year to support the economy. This has boosted the attractiveness of the Australian dollar. Secondly, recent economic data has been encouraging, with business activity returning to growth in February and wage growth hitting its highest level since 2009. The improving economic outlook has supported the currency.
Over the coming weeks and months, further gradual RBA policy easing and continued positive economic data should provide ongoing support for the Australian dollar. An expected moderation in both inflation and unemployment through 2024 is likely to cement a case for lower interest rates, weighing down the US dollar and lifting the Australian dollar potentially toward $0.67. Risks remain around the global economic outlook however, which could spark bouts of risk aversion and Aussie dollar weakness.
NZD - Cautiously Optimistic Outlook
The New Zealand dollar has remained relatively stable over the past 14 days. Minor fluctuations have been driven by mixed economic data and sentiment. The contraction in GDP and rise in unemployment have exerted some downward pressure. However, this has been offset by optimism around lower inflation and the potential for future interest rate cuts.
Over the coming weeks and months, the NZD may strengthen slightly if inflation continues to ease and the RBNZ cuts rates as expected. This could boost economic growth. However, risks remain around global growth and commodity prices which could limit significant gains. Overall, the currency looks set to trade in a relatively narrow range barring any major domestic or global shocks.
Gavin Pearson
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