Dollar Inflation Dynamics to Bring Volatility
Market Analysis for Week Number 07 2024
DERBYSHIRE UK, Feb 12, 2024, Week 7. Welcome to Monday. The US economy's resilience is evident with a Q4 expansion of 3.3%, yet signs of moderation loom as consumer spending slows. Inflation remains a focal point, with a slight uptick to 3.4% in December, while the labour market adds a robust 353,000 jobs in January. The US Dollar's trajectory will be shaped by revised CPI figures and the Fed's rate decisions, with key data releases on inflation and retail sales this week. Geopolitical developments continue to influence market sentiment, making the upcoming days critical for currency movements.
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US Dollar Outlook Amid Economic and Geopolitical Crosscurrents
The US economy, navigating significant challenges and transitions, has shown resilience with an annualised expansion of 3.3% in Q4 2023, exceeding expectations. However, a deceleration in consumer spending and a modest contribution from private inventories suggest a potential moderation in economic momentum. Despite this, the acceleration in exports and non-residential investment, along with a slower pace in government spending, indicate an economy adjusting to changing conditions while still finding growth avenues.
Inflation, a key concern for policymakers and markets, saw a slight uptick to 3.4% in December 2023, with core inflation showing signs of easing. This suggests a disinflationary process is underway, albeit with inflation levels still above the Fed's comfort zone. The labour market remains robust, with the addition of 353,000 jobs in January 2024, significantly outpacing expectations. This strong job growth signals a tight labour market, yet the unemployment rate held steady at 3.7%, indicating a complex dynamic between job creation and labour force participation.
The US Dollar's performance has been influenced by these economic indicators and the broader sentiment. The dollar index, after falling below 104.1, has since made a modest recovery, marking its fourth consecutive weekly advance. The revised CPI figures and the Fed's commitment to lowering interest rates in 2024 have impacted market expectations, with the likelihood of a rate cut in March now sitting around 19%.
Looking ahead, the US Dollar may find support at the 104.1 level, with resistance potentially forming at higher levels as market participants digest incoming economic data and reassess the Fed's policy trajectory. The next few weeks will be crucial for the dollar, as it responds to new information and market sentiment.
Several geopolitical situations could significantly impact the US economic outlook and currency sentiment, leading to fluctuations in trade balances, shifts in foreign policy, market volatility, and changes in currency strength. The interconnectedness of global economies means that regional instabilities can have ripple effects, influencing investor confidence and the broader economic landscape in which the US operates.
Key economic events due within the next seven days:
Inflation rate data release: Tuesday, February 13, 2024.
Retail sales month-over-month update: Thursday, February 15, 2024.
Canadian Currency and Commodity Watch: Navigating Inflation and Geopolitical Tides
The Canadian economy is at a crossroads, with the Bank of Canada's decision to maintain its overnight rate at 5% in January 2024 reflecting deep concerns over inflation, particularly in core price growth. Despite high-interest rates, the highest in 22 years, signs of economic slowdown are evident, marked by reduced consumer spending, contracting business investment, and softening labour market conditions. The contraction of the Canadian GDP by 0.3% in the third quarter of 2023, primarily due to a significant drop in exports, underscores the challenges posed by tight monetary policy.
Inflation remains a persistent challenge, with the annual rate climbing to 3.4% in December 2023, driven by rising gasoline costs and transportation expenses. The housing market continues to exert inflationary pressures, with high mortgage rates impacting home ownership and rent prices. However, the labour market has shown resilience, with the addition of 37,300 jobs in January 2024, easing the unemployment rate to 5.7%.
The Canadian dollar has recently strengthened, trading past 1.345 per USD, buoyed by the positive labour report. This may provide the Bank of Canada with the confidence to maintain restrictive interest rates to curb inflation. The currency's outlook remains cautious, with expectations of trading around 1.35 by the end of the quarter and potentially reaching 1.38 in 12 months.
Oil prices, particularly WTI crude futures, have settled at $76.84 per barrel, reflecting a weekly gain of over 6%. Geopolitical tensions in the Middle East have been a key driver of oil prices, with ongoing military operations by Israel in Gaza and a U.S. drone strike in Baghdad escalating regional instability.
Looking ahead, the Canadian dollar and oil prices may find support and resistance levels influenced by both domestic economic performance and external geopolitical events. Upcoming economic reports on inflation, GDP, interest rates, and unemployment will be critical in shaping the economic and currency outlook.
Key economic events due within the next seven days:
February 20, 2024 (Tuesday): Inflation Rate Report
February 29, 2024 (Wednesday): Monthly GDP MoM Report
Euro-Area: Navigating Economic Uncertainties Amid Inflation and Geopolitical Tensions
The Euro-Area economy is treading a complex landscape marked by high interest rates, inflationary pressures, and geopolitical uncertainties. The European Central Bank (ECB) has maintained interest rates at a 22-year high, reflecting its commitment to stabilising inflation at its 2% target. Despite a stagnant performance in the last quarter of 2023, the Euro-Area economy averted a recession, thanks to better-than-expected growth in Spain and Italy. However, the outlook for 2024 remains challenging due to high borrowing costs, softer demand, and a subdued manufacturing sector.
Inflation in the Euro Area decreased slightly to 2.8% year-on-year in January 2024, suggesting a gradual easing of price pressures. However, the retail sector is facing challenges due to high inflation and borrowing costs impacting consumer demand. The unemployment rate remained stable at 6.4% in December 2023, reflecting a historically low level of joblessness, but future increases in unemployment remain a concern.
The Euro has shown resilience, hovering around $1.077, as investors recalibrate their expectations regarding the ECB's monetary policy stance. The currency's outlook remains cautious, with potential support and resistance levels influenced by the ECB's future policy decisions, economic data releases, and global market dynamics.
Looking ahead, the Euro-Area economy faces a delicate balance between managing inflation, supporting economic growth, and navigating external challenges. The ECB's monetary policy will play a crucial role in shaping the economic landscape, with a focus on evidence-based decisions to ensure a return to the inflation target.
Key Economic Events in the Next Seven Days:
February 14, 2024 (Wednesday): Euro Area GDP Growth Rate (Q4 2023) Preliminary Estimate
UK Economic Outlook: Cautious Amid Inflation and Policy Uncertainty
The United Kingdom's economy is navigating through turbulent waters, marked by persistent inflationary pressures and a cautious monetary policy stance. The Bank of England's decision to maintain the key Bank Rate at a 16-year high of 5.25% reflects a complex balancing act between curbing inflation and supporting economic activity. Despite a stable interest rate, the central bank faces internal divisions on the future direction of monetary policy, highlighting the uncertainty surrounding the UK's economic path.
The UK's economic activity contracted by 0.1% in the third quarter of 2023, with the services sector experiencing notable declines. This contraction, alongside downward revisions of previous quarters' figures, signals the looming risk of a recession. The economy is further strained by declining household spending and business investment, exacerbating the challenges ahead.
Inflation's unexpected rise to 4% in December 2023, driven by increases in the prices of alcohol, tobacco, and recreational activities, complicates the Bank of England's efforts to steer inflation back to its 2% target. Retail sales have also suffered, with a significant 3.2% drop in December 2023, reflecting the impact of inflation on consumer purchasing power and confidence.
On a brighter note, the unemployment rate has decreased to 3.9%, the lowest level since early 2023. However, the slight decline in the employment rate and an increase in economic inactivity suggest that the labour market's strength may not be as robust as the headline figure suggests.
The British pound has remained relatively steady, trading around $1.26, supported by tempered expectations of early interest rate cuts by both the UK and US central banks. The housing market's resilience provides some support to the pound, but the outlook suggests potential support and resistance levels around the 1.25 and 1.23 marks, respectively, over the next few weeks.
Key economic events in the next seven days:
February 13 (Monday): UK Unemployment Rate report
February 14 (Tuesday): UK Inflation Rate report
February 15 (Wednesday): UK Monthly GDP MoM report
February 16 (Thursday): UK Retail Sales MoM report
Swiss Franc Outlook: Navigating Modest Growth and Inflationary Challenges
The Swiss economy, a bastion of stability, is currently experiencing a phase of cautious equilibrium, marked by modest growth and controlled inflation. The Swiss National Bank (SNB) has held its key policy rate steady at 1.75%, signalling a prudent stance in light of slightly eased inflationary pressures. Inflation, having decelerated to 1.4% in November, is expected to climb, influenced by factors such as escalating electricity costs, rising rents, and an increase in value-added tax. The central bank forecasts an average annual inflation of 2.1% for 2023, with a gradual reduction to 1.6% by 2025.
Economic expansion is projected to be subdued, with a growth rate of around 1% for 2023 and an anticipated 0.5% to 1% for 2024. The services sector, particularly health and social care, trade, and transport and communication, has been a significant growth driver, while the manufacturing sector has remained static. The unemployment rate saw a slight uptick to 2.5% in January, up from 2.3% in December 2023, hinting at broader economic headwinds.
The Swiss Franc has recently weakened, trading past 0.87 per USD, its lowest in nearly two months, primarily due to a robust US dollar and the SNB's interventions to temper the Franc's strength. The currency may encounter support and resistance levels in the coming weeks, influenced by domestic economic indicators and global market dynamics. Its status as a safe-haven currency could bolster demand amidst international uncertainty, while a strong US dollar or shifts in global risk sentiment could pose challenges.
Forex traders should closely monitor the upcoming release of the latest inflation rate data on February 13, Tuesday, which will provide insights into the potential trajectory of the SNB's monetary policy. This data point is critical for assessing the balance between maintaining price stability and supporting economic growth, which remains a key focus of the SNB's strategy in these uncertain global conditions.
Key Economic Events:
Inflation Rate Data Release: February 13, Tuesday
Japan's Economic Resilience Amidst Uncertainty
Forex traders are currently navigating a complex economic landscape in Japan, marked by cautious optimism and uncertainty. The Bank of Japan (BoJ) has maintained its key short-term interest rate at -0.1% and aims to keep 10-year bond yields around 0%, signalling a cautious monetary policy stance in the face of fluctuating economic conditions. The BoJ has also adjusted its economic forecasts, slightly lowering its CPI projections for FY 2024 to 2.4% and revising its GDP growth forecast for 2023 down to 1.8%. However, the GDP outlook for FY 2024 has been revised upwards to 1.2%, reflecting some optimism about the economy's resilience.
Japan's economy contracted by 0.7% qoq in Q3 of 2023, the first GDP contraction since Q3 of 2022, due to declines in private consumption, capital expenditures, public investment, and a drag from net trade. Despite these challenges, the unemployment rate in Japan fell to 2.4% in December, the lowest since January, indicating strength in the job market. Inflation has moderated, with the annual rate decreasing to 2.6% in December 2023, the lowest since July 2022, although core inflation remains above the BoJ's 2% target for the 21st consecutive month.
The Japanese Yen has depreciated past 149 per dollar, reaching its weakest levels in over two months, reflecting market reactions to the BoJ's comments on a gradual approach to ending its negative interest rate policy. The BoJ acknowledges a rising likelihood of achieving its 2% price stability target, indicating a nuanced balance between supporting economic growth and managing inflation expectations.
The outlook for the Yen involves navigating economic uncertainty and policy caution. Domestic economic indicators, global market sentiment, and the BoJ's policy decisions will influence the currency's support and resistance levels. Over the next few weeks, key economic events and data releases will be closely watched for further insights into Japan's economic health and the potential direction of the Yen.
Key Economic Events Due Within the Next Seven Days:
Thursday, February 14, 2024: Japan's Monthly GDP MoM for Q4 2023
Monday, February 26, 2024: Japan's Inflation Rate for January 2024
Wednesday, February 29, 2024: Japan's Unemployment Rate for January 2024
Navigating Uncertainty: Australian Dollar Amid Economic Moderation and Geopolitical Risks
The Australian economy is currently navigating a complex landscape shaped by both domestic and international factors. The Reserve Bank of Australia (RBA) has maintained the cash rate at 4.35% in its first meeting of 2024, reflecting a cautious approach towards managing inflation and fostering economic stability. Despite a significant cumulative increase of 425 basis points over the past two years, inflation remains a concern, with the RBA indicating that further monetary tightening cannot be ruled out.
The Australian economy's growth trajectory has shown signs of moderation, with a quarterly GDP growth of 0.2% in Q3 of 2023. This slowdown can be attributed to a deceleration in fixed investment and household consumption, alongside a negative contribution from net trade. Despite these challenges, the economy has demonstrated resilience, with a year-over-year GDP growth outperforming forecasts.
The Australian dollar has experienced subdued performance, hovering around $0.65, influenced by the RBA's monetary policy stance and global economic uncertainties. The currency's outlook remains cautious, with potential support and resistance levels closely tied to domestic economic indicators, global market sentiment, and the economic trajectory of key trading partners, notably China.
Several key geopolitical situations could potentially disrupt the economic outlook and currency sentiment of Australia or China. These include Australia-Papua New Guinea relations, China's regulatory changes, the Myanmar peace process, EU-China solar panel trade, China's semiconductor advancements, and real estate financing in China. These geopolitical situations underscore the intricate web of relations and dependencies that shape the economic and currency sentiment landscapes of Australia and China.
Looking ahead, the Australian dollar's trajectory will likely be influenced by a combination of domestic economic indicators, the RBA's monetary policy decisions, and global economic conditions. Key support and resistance levels in the coming weeks will be determined by market reactions to new economic data, policy announcements, and shifts in investor sentiment.
Key Economic Events in the Next Seven Days:
Thursday, February 15, 2024: Australia's Unemployment Rate (December 2023)
New Zealand's Economic Balancing Act: Navigating Inflation, Growth, and Geopolitical Risks
The New Zealand economy is currently in a state of recalibration, with the Reserve Bank of New Zealand (RBNZ) maintaining a cautious approach to managing inflation and supporting sustainable employment. The RBNZ has kept the official cash rate (OCR) at 5.5%, reflecting a commitment to restrictive interest rates to anchor inflation within the target range of 1 to 3%. Despite a contraction of 0.3% in the GDP for the quarter ending September 2023, growth is expected to rebound to 0.30% by the end of the current quarter.
Inflation is showing signs of easing, with the annual rate decreasing to 4.7% in the December quarter from 5.6% in the previous quarter. This deceleration is partly due to slower increases in housing and household utilities, food costs, and alcoholic beverages and tobacco prices. The inflation rate is projected to further decline to 4.30% by the end of this quarter.
The unemployment rate in New Zealand edged up to 4% in the December quarter of 2023, maintaining the highest level since June 2021. The labour force participation rate slightly decreased, indicating a marginal softening in the labour market. The unemployment rate is expected to rise to 4.50% by the end of the current quarter.
The New Zealand Dollar's performance in the coming weeks will likely be influenced by these economic fundamentals. With the RBNZ's restrictive monetary policy stance, the currency may find support as higher interest rates typically attract foreign investment. However, the contraction in GDP and the easing inflation could weigh on the currency, suggesting potential resistance levels as investors reassess the economic outlook.
Geopolitical risks, including New Zealand's potential involvement in AUKUS Pillar II, China's advancements in semiconductor production, EU-China solar panel dynamics, South China Sea tensions, and fluctuations in global commodity prices, could disrupt the economic outlook and currency sentiment of New Zealand.
Gavin Pearson
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