DERBYSHIRE UK, Mar 04, 2024, Week 10. Welcome to Monday. This week brings several pivotal data releases and events that could impact major currency pairs. On Tuesday, we get UK and US Services PMIs to gauge economic momentum. Wednesday has the BoC rate decision where no change is expected, US ADP payrolls, and Fed Chair Powell testifying. Thursday sees the ECB rate decision where rates should hold at 4.50%, plus US jobless claims. Finally, Friday brings the big February US jobs report forecast at 190K and Canadian jobs data.

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Steady Growth Ahead for US Dollar Despite Global Uncertainties

Recent economic data and market sentiment point to continued steady growth for the US dollar over the short-term, albeit at a more moderate pace compared to 2023. The US economy remains resilient, with GDP expanding at a 3.2% annualised rate in Q4 2023 and strong job gains continuing into 2024. However, manufacturing activity slowed in February, likely impacted by lingering supply chain disruptions and effects from winter storms.

While inflation decreased slightly in January to 3.1%, it remains above the Fed's 2% target. With inflation sticky and geopolitical uncertainties persisting, including tensions in the Middle East and Russia's ongoing invasion of Ukraine, the Fed is likely to keep interest rates unchanged in the near-term. Market participants have scaled back expectations for rate cuts in 2024.

Going forward into March, traders should monitor critical economic data releases for signals on the health of the US economy and inflation. The February ISM Services PMI on March 5 will provide insight into the dominant services sector. Additionally, the February jobs report and CPI data in the second week of March will be pivotal to gauge labour market strength and price trajectory.

Given steady economic projections but lingering inflation concerns, the US dollar looks positioned for further gradual gains in March. However, unexpected weakening in economic reports or substantial geopolitical flare-ups could spur more dovish Fed policy bets and lead to pullbacks for the greenback. With uncertainties ahead, traders should be tactical around economic events and cautious on directional USD exposure.

Recent Economic Slowdown Clouds Loonie Outlook; Oil Prices Offer Support

Canada's economy is showing increasing signs of slowing after a period of strong growth, with Q4 2023 GDP expanding at just 0.2% compared to 0.5% in Q3. High interest rates appear to be taking a toll, with business investment contracting for the sixth time in seven quarters. However, exports rebounded in Q4 thanks to increased crude oil and crude bitumen sales. This underscores foreign demand for Canadian energy exports which should stimulate capital inflows. The loonie fell to a near 3-month low against the greenback in late February but rebounded past 1.355 with support from stronger-than-expected Q4 GDP data.

Going forward, the Canadian dollar will likely trade between 1.34-1.37 per USD over the next 3 months. An expected slowdown in Q1 2024 GDP growth to 0.5% and a rise in unemployment could weigh on the loonie. However, recovering oil prices and speculation that OPEC+ will extend supply cuts should provide support. The BoC is also expected to start cutting rates by mid-2024 as inflation eases, which could boost the loonie.

Key data that forex traders should monitor next week include Canada's trade balance and building permits on March 6, the BoC's rate decision on March 6 where rates are expected to be held at 5%, Canada employment numbers on March 8, and US nonfarm payrolls on March 8 forecast at 190k.

Stagnating Growth and Stubborn Core Inflation Weigh on Euro

The Euro Area economy showed little momentum in 2023 amid persistent economic headwinds, with full-year growth slowing sharply to just 0.5%. While headline inflation has declined from peak levels, core inflation remains stubbornly high at 3.1% in February. With interest rates expected to stay restrictive for an extended period, consumer spending and business investment will likely drag through the first half of 2024.

However, the outlook may improve in the second half as real incomes recover and export growth picks up. GDP is projected to expand a modest 0.3% quarter-over-quarter through Q1 2024 before strengthening to 1.2% growth in 2025. Key data to monitor include EU Composite and Services PMIs on March 5th and US ADP Employment figures on March 6th.

The EUR/USD increased to 1.0839 on March 1st from 1.0803, reflecting evidence of slowing inflation in the Euro Area. The easing price pressures reinforce market expectations that the ECB will start cutting interest rates in June, rather than April as previously anticipated. The EU50 stock index also reached new highs on March 1st, lifted by disinflating trends across the bloc.

The EUR/USD exchange rate is forecast to trade around the 1.08 level near-term as markets await further confirmation of slowing inflation before bringing forward bets on ECB rate cuts. However, the Euro could strengthen heading into 2025 if growth and inflation data continue trending favourably. Upside risks include intensifying geopolitical tensions that drive up gas prices, or fiscal tensions re-emerging in highly indebted countries like Italy.

Cautious Optimism for Pound as Economy Stabilises

Recent economic data suggests the UK economy is showing early signs of stabilisation after a turbulent 2023, lending some support to the British pound. Key indicators like GDP, inflation, unemployment, and retail sales improved modestly in January compared to late 2022.

However, risks remain elevated around energy prices, interest rates, global growth and other factors. The Bank of England may need to maintain tight monetary policy for some time to ensure inflation returns sustainably to target. This could weigh on sterling in the near-term.

Market participants will closely monitor the economic calendar for further evidence the economy is turning a corner. Upcoming data to watch includes the services and composite PMIs on March 5, which could show if business activity and confidence are recovering. The March 6 budget announcement will also be important for fiscal policy and tax cut implications.

For now, sterling appears to have found some footing above $1.26 after rebounding from 2022 lows. But uncertainty persists, and the pound could remain range bound between $1.22-$1.28 over the coming months absent clearer recovery signals. Sterling may struggle to break out above $1.30 without a broader improvement in economic fundamentals and global risk appetite.

In summary, while risks are tilted to the downside, there is room for cautious optimism around the pound if the recent stabilisation in UK data can be sustained. But sterling will likely continue facing headwinds until the growth and inflation outlook becomes less murky. Patience and prudence are warranted for pound traders and investors navigating still-choppy waters.

Slowing Growth and Moderating Inflation Cloud Franc Outlook

Switzerland's economy shows signs of slowing growth, with GDP expanding just 0.3% in Q4 2023 and forecast to rise another tepid 0.3% in Q1 2024. Inflation has also moderated to a low 1.3% in January, easing pressure on the Swiss National Bank (SNB) to tighten policy. However, the SNB indicates it stands ready to act if needed to keep inflation to its 2% target range. With uncertain GDP and inflation dynamics, the central bank will closely monitor data to chart an appropriate policy course.

Looking ahead, forex traders should watch Swiss inflation figures in the week ahead, including February CPI data on March 2nd, for signals on the SNB's policy inclination. Manufacturing PMIs from China and the Eurozone, Switzerland's main trading partners, will also help gauge external demand pressures when released March 1st and 3rd, respectively. Later in the week, US employment indicators like ADP payrolls and job openings on March 6th may influence Fed policy expectations and thus Franc strength relative to the Dollar. With slowing growth and inflation now below target, risks remain tilted toward Franc weakness, though policymakers seem poised to counter excessive currency depreciation.

Gavin Pearson

Retail trader since 2008
Specialises in forex
Funded account from the 5ers.com
Member of the eToro Popular Investors Program
Regular contributor to FXStreet.com analysis and education pages

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