DXY on the Rise: Bullish Momentum Amid Economic Optimism
Market Analysis for Week Number 04 2024
DERBYSHIRE UK, Jan 25, 2024, Week 4. Welcome to Friday. The US Core PCE Price Index MoM is coming out. This is a key inflation metric that could signal where the Fed's heading with interest rates, potentially giving the USD a boost.
Trading involves a possibility of losing money therefore all decisions in market speculation are undertaken at your own financial risk.
Macroeconomic Snapshot
United States: Moderate Growth with a Slight Slowdown Expected: The United States economy is currently experiencing a period of moderate growth, with a slight slowdown expected in the coming weeks. The Federal Reserve has kept the fed funds rate steady at 5.25%-5.5% for a third consecutive meeting in December 2023, but has indicated 75bps cuts in 2024. Economic growth has slowed and job gains have moderated but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. The GDP growth is expected to be higher this year (2.6% vs 2.1% in the September projection), but slightly lower in 2024 (1.4% vs 1.5%).
Canada: Contraction with a Slight Recovery Expected: The Canadian economy is currently experiencing a period of contraction, with a slight recovery expected in the coming weeks. The Bank of Canada held the target for its overnight rate at 5% for the fourth consecutive decision in January 2024, leaving benchmark borrowing costs at a 22-year high. The central bank expects headline inflation to remain unchanged near the 3% mark during the first half of the year before easing to the 2% target in 2025. The Canadian GDP contracted by 0.3% in the third quarter of 2023, marking its first decline since the second quarter of 2021.
Euro-Area: Challenging Economic Outlook: The Euro-Area faces a challenging economic outlook, with the European Central Bank (ECB) maintaining high interest rates to combat inflation, despite concerns about a potential recession. The main refinancing operations rate remains at a 22-year high of 4.5%, and the deposit facility rate is at a record 4%. The ECB has maintained a somewhat hawkish stance due to persistent price pressures within the Eurozone and geopolitical uncertainties. The Eurozone economy contracted by 0.1% during the third quarter of 2023, marking the first decline in GDP volumes since the final quarter of 2022.
United Kingdom: Challenging Economic Outlook: The United Kingdom's economic outlook is also challenging, with the Bank of England maintaining its benchmark interest rate at a 15-year high of 5.25% to combat inflation, despite signs of a deteriorating economic landscape. The British economy shrank 0.1% on quarter in Q3 2023, with the services sector falling 0.2%, led by a 1.4% decline in information and communications. Household spending declined more than expected, mainly dragged by social protection; jewellery, clocks and watches, restaurants and hotels.
Switzerland: A Period of Economic Uncertainty: Switzerland's economic outlook for the next six weeks is marked by uncertainty. The Swiss National Bank (SNB) has maintained its key policy rate at 1.75% for two consecutive meetings, citing a slight decrease in inflationary pressure. However, the SNB has also noted that uncertainty remains high and will continue to monitor inflation closely, adjusting its monetary policy if necessary to ensure inflation remains within the range consistent with price stability over the medium term.
Japan: A Slow Recovery Amid Global Headwinds: Japan's economic outlook for the next six weeks is characterised by a slow recovery amid global headwinds. The Bank of Japan (BoJ) kept its key short-term interest rate unchanged at -0.1% and that of 10-year bond yields at around 0% during its January meeting. In a quarterly outlook, the BoJ slashed CPI readings for FY 2024 to 2.4% from October's projections of 2.8%, reflecting a recent decline in oil prices.
Australia: Cautiously Optimistic: Australia's economic outlook for the next six weeks is cautiously optimistic. The Reserve Bank of Australia (RBA) has maintained its cash rate at 4.35%, with the expectation that it will remain at this level by the end of the quarter. The RBA is closely monitoring inflation, which is being driven more by domestic demand than foreign supply shocks. The goal is to bring inflation back to the 2-3% range, but progress has been slower than anticipated.
New Zealand: Stability with Some Concerns: New Zealand's economic outlook for the next six weeks is one of stability, albeit with some concerns about excess demand and cost pressures. The Reserve Bank of New Zealand (RBNZ) has kept its official cash rate (OCR) at 5.5%, with the expectation that it will remain at this level by the end of the quarter. The RBNZ is confident that the current level of the OCR is restricting demand, but is concerned about ongoing excess demand and cost pressures.
Forex Market Sentiment
DXY: Bullish Momentum Amid Economic Optimism: The U.S. Dollar Index (DXY) has been experiencing a bullish trend recently, with the index reaching around the 103.37 mark. This upward momentum is driven by a combination of factors including strong GDP growth, positive market sentiment, and anticipation of upcoming economic data. The market's optimism is fueled by the robust U.S. economic performance, which has led to a surge in demand for the dollar. However, the market is also closely watching the Federal Reserve's decisions and other macroeconomic indicators for signs of potential shifts in the economic landscape.
EUR/USD: Bearish Sentiment Amid Economic Resilience: The EUR/USD pair has been experiencing a bearish sentiment in recent days, with the exchange rate hovering near the 1.09 level. The pair has been influenced by a mix of factors, including economic indicators, geopolitical events, and monetary policy decisions. The U.S. dollar has edged higher following data that showed the world's largest economy grew at a faster pace, suggesting the Federal Reserve would be in no rush to cut interest rates. This has led to a generally stable dollar index, making it difficult for the euro to gain strength.
GBP/USD: Consolidation Above Key Levels: The GBP/USD pair has been consolidating in a tight channel slightly above the 1.27 level. The rebound of the major pair is bolstered by the risk-on environment. However, rising geopolitical tensions, particularly in the Red Sea, might boost safe-haven asset demand and cap the upside of the pair. The pound sterling has lost ground despite hotter-than-expected UK inflation, as the tempered rate cut outlook from the U.S. Federal Reserve bolstered the sentiment around the U.S. dollar.
USD/CHF: Bullish Sentiment Amid Market Corrections: The USD/CHF pair has been exhibiting an uptrend, with the market currently in a correction phase. The pair is approaching a buying opportunity around the 0.85300 zone, moving away from lower levels and potentially towards higher ones. This trend is influenced by various market factors, including movements in cross exchange rates such as EUR/CHF or GBP/CHF.
USD/JPY: Bearish Sentiment Amid Speculation of Rate Cuts: The USD/JPY pair has been losing ground due to speculation of Fed interest rate cuts in March. The pair has plunged to near 147.50, moving away from higher levels and potentially towards lower ones. This downward trend is influenced by several factors, including better-than-expected data from Japan that might have supported the JPY. The US Dollar faces challenges due to downbeat US yields and improved risk appetite.
AUD/USD: Cautious Optimism Amid Economic Uncertainty: The AUD/USD pair has been experiencing a period of volatility, with the Australian Dollar struggling to gain ground amid a stable US Dollar. The pair has been moving away from the 0.7263 level, with potential to approach the 0.7000 mark. This movement has been influenced by better-than-expected flash Manufacturing and Services data from Australia, which has provided some support for the AUD.
NZD/USD: Modest Gains Amid Market Uncertainty: The NZD/USD pair has been posting modest gains above the mid-0.6000s, moving away from this level and potentially towards higher levels. These movements have been influenced by a risk-on impulse in the market, which has provided some support for the NZD. However, concerns about a potential downturn in a slowing economy and subdued investor sentiment in China have capped the upside of the pair.
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
Returned 27% in 2022 and -2.7% in 2023
Exclusively 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-