Dollar Hinges on US Data, Yen Eyes Hope
Market Analysis for Week Number 02 2024
DERBYSHIRE UK, Jan 07, 2024, Week 2. Hello to the new readers and welcome back to the regulars. The upcoming week marks a significant shift in market dynamics with traders returning to their desks in full force. We can expect to see a sharp increase in liquidity, which should hopefully stabilise market movements after the somewhat volatile trading seen on Friday. Attention will be towards the US inflation rate data for December which is expected to have remained above 3%.
Trading involves a possibility of losing money therefore all decisions in market speculation are undertaken at your own financial risk.
Macroeconomics
UNITED-STATES: While economic growth remains respectable, recent moderation, inflation hovering above the Fed's target, and a slowdown in job gains are acting as headwinds. However, signs of easing inflation, resilient consumer spending, and continued job creation provide tailwinds. This mixed picture has kept the Fed on hold, causing the dollar to trade sideways as markets await clearer signals about future rate hikes. The Trading Economics forecasts of slower GDP growth and higher unemployment could weigh on the dollar, while a persistent decline in inflation might pave the way for earlier-than-expected rate cuts, potentially boosting it. Ultimately, the direction of the dollar hinges on the Fed's dance between taming inflation and avoiding recession, keeping market participants glued to economic data releases and central bank pronouncements.
EURO-AREA: The Euro is facing a complex situation due to mixed economic signals and varying inflation rates. While recent GDP contraction indicates a potential slowdown, there's hope from steady household consumption and public spending. Inflation is high but showing signs of easing, leading to debates about the ECB future rate hikes. Despite the ECB's firm stance, market expectations suggest possible easing. This uncertainty has led to the Euro's volatility, influenced by economic data and ECB signals. Predictions of slow growth and higher unemployment could weaken the Euro, but a quicker inflation decline might lead to earlier rate cuts, boosting the currency. The Euro's future depends on the balance between ECB policies and the Eurozone's economy, with global factors like the US Federal Reserve's actions also playing a role.
UNITED-KINGDOM: The Pound-Sterling is experiencing volatility due to mixed signals. High inflation prompts the BoE to stay hawkish, but signs of a shrinking economy and decreasing inflation suggest a possible policy change. Recent GDP decline and reduced business investment raise recession concerns, pressuring the Pound, while strong retail sales and a robust labour market indicate some economic resilience. The currency's value changes with new data and speculation about the BoE's decisions. Markets had expected early rate cuts but now see them likely around June, aligned with the BoE's focus on controlling inflation. Predictions of slow growth and higher unemployment could further weaken the Pound, while a quicker inflation drop and softer BoE stance might strengthen it sooner. The Pound's future depends on how the BoE balances its inflation fight, economic surprises, and wider monetary trends, especially the U.S. Federal Reserve's actions.
JAPAN: The Japanese economy is experiencing a mix of challenges and positive signs, affecting the Yen. Negative growth in Q3 2023, high inflation, and ongoing monetary easing by the Bank of Japan have put pressure on the currency. However, a stable job market and slight inflation decrease offer some optimism. Predictions suggest modest economic recovery and potential currency strengthening, but if recovery lags or inflation persists, the Yen could face more downward pressure.
Currency Pairs
USD/JPY: In the short term, the USD/JPY has appreciated since December 31, driven by revised expectations for the Federal Reserve's monetary policy, influenced by strong US economic indicators, leading to anticipation of delayed rate cuts. This has strengthened the Dollar, with rising Treasury yields, while the Yen weakened due to Japan's continued loose monetary policy and economic pressures. However, over the long term, since November 25, the USD/JPY has depreciated due to varied factors, including mixed US economic signals suggesting a slowdown and potential Dollar stabilisation. In Japan, despite current issues, positive signs like a tighter labour market and reduced inflation hint at economic normalisation, which could support the Yen if the Bank of Japan adjusts its policy. Therefore, while short-term factors have favoured the Dollar, longer-term trends and possible policy changes in both countries indicate a more nuanced and potentially reversing trajectory for the USD/JPY exchange rate.
Here are some key events to watch in relation to the USD/JPY:
Thursday, January 11, 2024 - US Core Inflation Rate YoY and MoM DEC & US Inflation Rate YoY and MoM DEC
Wednesday, January 17, 2024 - US Retail Sales MoM DEC
Friday, January 19, 2024 - JP Core Inflation Rate YoY DEC
Friday, January 19, 2024 - US Michigan Consumer Sentiment Prel JAN
GBP/USD: In the short term, the GBP/USD exchange rate has been stable since December 31, due to opposing factors influencing both the Pound and the Dollar. The Pound has been supported by the Bank of England's high-interest rates combating inflation and a contracting GDP, yet tempered by the prospect of 2024 rate cuts due to easing inflation and a slowdown. The Dollar has been buoyed by strong labour data, suggesting resilience, but undercut by potential Federal Reserve rate cuts amid a broader slowdown. Over the long term, since November 25, the GBP/USD has appreciated, primarily driven by a changing view of the US Dollar. Despite positive job data, mixed US economic indicators have led to a perception of a dovish Federal Reserve, diminishing the Dollar's appeal. Conversely, the Pound has been relatively strengthened by the UK's high-interest rates and tight labour market, offering some resistance to inflation and economic challenges. Nevertheless, the future remains uncertain, with both currencies vulnerable to changing economic conditions and policy decisions.
Here are some key events to watch in relation to the GBP/USD:
Thursday, January 11, 2024, US CPI DEC & US Core Inflation Rate YoY DEC
Tuesday, January 16, 2024, GB Unemployment Rate NOV & GB Average Earnings incl. Bonus (3Mo/Yr) NOV
Wednesday, January 17, 2024, GB Inflation Rate YoY DEC & GBCore Inflation Rate YoY DEC
Wednesday, January 17, 2024, US Retail Sales MoM DEC
EUR/USD: In the short term, the EUR/USD has depreciated since December 31 due to factors impacting both the Euro and the US Dollar. The Euro is under pressure from the European Central Bank's (ECB) struggle to balance fighting inflation with an economic slowdown, as shown by unexpected GDP declines and inconsistent retail data, leading to a cautious stance and contributing to its depreciation. Meanwhile, the Dollar has strengthened amidst mixed economic indicators that suggest the Federal Reserve might continue or slow down rate cuts, thanks to robust labour data and persistent inflation. Over the long term, the EUR/USD has been stable since November 25, reflecting a period of economic challenges for the Euro and mixed performance for the Dollar. This stability is a result of the ongoing tug-of-war influenced by each central bank's policies and market expectations, keeping the EUR/USD relatively steady. The future direction of the EUR/USD will likely be determined by how the ECB and Fed respond to their respective economic indicators.
Here are some key events to watch in relation to the EUR/USD:
Friday, January 05, 2024 (EA Inflation Rate YoY Flash DEC)
Wednesday, January 10, 2024 (EA ECB Guindos Speech)
Thursday, January 11, 2024 (US Core Inflation Rate MoM DEC)
Wednesday, January 17, 2024 (US Retail Sales MoM DEC)
EUR/GBP: In the short term, the EUR/GBP has depreciated since December 31, influenced by economic trends and central bank policies in both the Eurozone and the UK. The Euro has faced downward pressure due to the European Central Bank's (ECB) tough stance on inflation, despite a slowing economy, increased inflation, and weak PMI data indicating ongoing contraction, reducing its attractiveness. Conversely, the Pound has gained some support from the UK's strong labour market and the Bank of England's (BoE) stringent monetary policy, though future rate cuts are anticipated. Over the long term, since November 25, the EUR/GBP has continued to lose value, mirroring the Eurozone's broader economic difficulties, like sluggish GDP growth, and a cautious outlook. Meanwhile, the Pound has been relatively supported by economic strains that justify short-term high interest rates, with both the BoE and the Federal Reserve expected to cut rates in 2024 due to easing inflation and a slowdown. The evolving dynamics between the ECB's firm stance against inflation and the BoE's approach to managing inflation and growth will further influence the EUR/GBP's direction.
Here are some key events to watch in relation to the EUR/GBP:
Friday, January 05, 2024, EA Inflation Rate YoY Flash DEC & GB Halifax House Price Index YoY DEC
Friday, January 12, 2024, GB GDP MoM NOV & GB Industrial Production MoM NOV
Tuesday, January 16, 2024, GB Unemployment Rate NOV & GB Average Earnings incl. Bonus (3Mo/Yr) NOV
Wednesday, January 17, 2024, GB Inflation Rate YoY DEC
Gavin Pearson
Retail trader since 2008
Specialises in forex G7 currencies
Funded account from th e5ers.com
Member of the eToro Popular Investors Program
Regular contributor to FXStreet.com analysis and education pages
Returned 27% in 2022 and 5.8% in 2023 H1
Forex focused
Copy Trading available at eToro
Disclaimer
Past performance is not indicative of future results
Trading involves risk, and you could lose money
-end-