FOMC Day: Investors looking for the Fed to signal a cut will be disappointed.
Market Analysis for Week Number 05 2024
DERBYSHIRE UK, Jan 31, 2024, Week 5. Welcome to Wednesday. This week brings key events that could trigger volatility across financial markets. The Federal Reserve's January FOMC meeting concludes Wednesday, where investors await signals on potential rate cuts later this year amid slowing growth and inflation. Then Friday sees the release of January's US jobs report, with economists forecasting a 175,000 gain in nonfarm payrolls following December's robust 216,000 increase. The data could impact rate hike expectations. Also watch wage growth and unemployment, as the Fed monitors labour market strength. Overall, cautious optimism persists, but surprises on either front could change the tone.
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United States: Cautious Optimism Amid Slowing Growth
Economic Indicators: Key economic indicators show signs of slowing growth in the US economy. The Federal Reserve kept interest rates steady in December 2023 but indicated potential rate cuts in 2024 as inflation eases and economic growth slows. GDP growth is expected at 2.6% in 2023 and 1.4% in 2024, while inflation is projected lower in both years. Unemployment is forecast to remain low at 3.8% in 2023 and rise slightly to 4.1% in 2024.
Monetary Policy: The Federal Reserve maintained its benchmark interest rate range of 5.25-5.50% in December, aiming to bring down still-high inflation. However, new projections point to 75 basis points of cuts in 2024 as economic growth slows and inflationary pressures continue easing. The Fed dot plot signals a year-end 2024 rate of 4.6%, down from 5.1% projected in September 2023.
Geopolitical Landscape: Key geopolitical events such as the Russia-Ukraine war, US-China tensions, and Middle East conflicts contribute uncertainty. However, some positive developments could support growth, including expanded India relations and potential shifts in Iranian oil supply. Lower global oil prices may also benefit the US economy.
Technical Analysis: The US Dollar Index (DXY) has shown remarkable resilience, trading around 103 despite high volatility. Key technical levels to watch are support at 100 and resistance at 107. Trading Economics forecasts the DXY at 103.16 by end of Q1 2024 and 106.38 in 12 months. Overall sentiment remains cautious but optimistic about the dollar's strength.
Upcoming Economic Events:
US Interest Rate : Next: in 0 days
US Monthly GDP MoM : Next: in 28 days
US Inflation Rate : Next: in 13 days
US Retail Sales MoM : Next: in 15 days
US Non-Farm Payrolls : Next: in 2 days
US Unemployment Rate : Next: in 2 days
Canada: Cautious Optimism
Economic Indicators: Key economic indicators show signs of slowing growth in Canada, as the economy contracts due to the lagged impact of restrictive monetary policy. However, inflation shows early signs of easing closer to the 2% target, indicating potential room for rate cuts later this year. The job market remains resilient for now. Oil prices are forecasted to trend higher over the next year, which could provide support.
Monetary Policy: The Bank of Canada held rates steady at 5% in January, keeping borrowing costs at the highest level in over 20 years. Policymakers noted risks remain to the inflation outlook, warranting a continuation of tight policy for now despite clear economic headwinds. Markets are sceptical rates can remain this high for long and are pricing in cuts potentially beginning this summer.
Geopolitical Landscape: The pause in UK-Canada free trade negotiations could impact bilateral trade flows going forward.
Technical Analysis: After peaking above 1.39 late last year, USD/CAD trended lower to start 2024 before finding support around 1.34. This area near the 200-day moving average could act as support, with resistance seen around 1.3540. Overall sentiment remains slightly USD/CAD bullish heading into February.
Upcoming Events:
CA Interest Rate : Next: in 35 days
CAP Monthly GDP MoM : Next: in 29 days
CA Inflation Rate : Next: in 20 days
CA Unemployment Rate : Next: in 9 days
Euro Struggles Amid Slowing Growth
Economic Indicators: Key economic indicators show a mixed picture for the Euro-Area economy. The benchmark interest rate was unchanged at 4.50% in January, with the ECB pledging to keep rates high to combat inflation. However, GDP growth stalled in Q4 2023, narrowly avoiding a technical recession. Inflation ticked up to 2.9% in December, though remains well below peak levels. The jobless rate hit a historic low of 6.4% in November. Trading Economics forecasts interest rates falling to 2.25% by 2025, GDP growth around 0.3%, inflation dropping to 2.1%, and unemployment stabilising around 6.6%.
Monetary Policy: The ECB concluded its rapid rate-hike cycle in September 2022, but has maintained a hawkish stance due to persistent inflation and geopolitical tensions. ECB President Lagarde stated it was premature to discuss rate cuts despite recession concerns. Some policymakers have signalled the next move could be a cut, but details remain unclear. The central bank vows to keep rates high until inflation reaches its 2% target.
Geopolitical Landscape: Key geopolitical events impacting the Euro-Area economy include the EU's bans on Russian oil imports, the blockade of the Red Sea, cyberattack threats, and internal tensions over the EU architecture. These events have increased downside risks and uncertainty.
Technical Analysis: The EUR/USD pair trades around 1.08 after declining from highs above 1.09 earlier in January. The pair faces resistance around 1.09 and support at 1.07. Bearish sentiment is reinforced by technical indicators and a downward channel pattern. Trading Economics forecasts EUR/USD at 1.08 by the end of Q1 2024 and 1.04 in 12 months.
Upcoming Events:
EA Interest Rate : Next: in 36 days
EA Monthly GDP MoM : Next: in 14 days
EA Inflation Rate : Next: in 1 days
EA Retail Sales MoM : Next: in 6 days
EA Unemployment Rate : Next: in 1 days
United Kingdom: Cautious Outlook Amid Slowing Growth and Falling Inflation
Economic Indicators: Key economic indicators show a mixed picture for the UK economy. The benchmark interest rate stands at a 15-year high of 5.25% as the central bank combats stubbornly high inflation. However, forecasts suggest interest rates will decline next year as inflation falls back toward the 2% target. GDP growth slowed to a flat 0.0% in Q3 2023 and is expected to remain subdued going forward at around 0.2-0.5% quarterly. Inflation dropped to 4.0% in December, marking the first increase in 10 months but remaining well above target. The unemployment rate held steady at 4.2% in November.
Monetary Policy: The Bank of England voted 6-3 in December to maintain its key interest rate at 5.25%, though three members advocated for a 25 bps hike. The central bank emphasised the need for an extended period of tight policy to curb inflation. However, as inflation shows signs of declining, investors expect interest rates to be cut starting in June 2024.
Geopolitical Landscape: Key geopolitical risks relevant to the UK economy and markets include tensions over Northern Ireland's post-Brexit arrangements, the Russia-Ukraine war, and potential further conflict in the Middle East. These tensions can disrupt trade flows, energy prices, and financial markets. So far their impact has been limited, but further escalation poses downside risks.
Technical Analysis: The GBP/USD exchange rate recently traded around 1.2692 after reaching a high of 1.2707. With inflation appearing to peak, the pound may stabilise going forward. However, weak growth prospects and easing rate hike expectations could exert downward pressure. Trading Economics forecasts the pair at 1.25 by the end of Q1 2024 and 1.20 in 12 months.
Upcoming Events
UK Interest Rate : Next: in 1 days
UK Monthly GDP MoM : Next: in 15 days
UK Inflation Rate : Next: in 14 days
UK Retail Sales MoM : Next: in 16 days
UK Unemployment Rate : Next: in 13 days
Switzerland: Cautiously Optimistic Economic Outlook
Economic Indicators: Key economic indicators show that while Switzerland's economy remains resilient, growth is expected to slow in the coming quarters. GDP expanded 0.3% in Q3 2023 and is forecast to grow around 0.4% in Q4. However, growth is projected to slow to 0.6% in 2023 and 1.2% in 2024 due to high inflation and a weaker global economy. The SNB sees inflation at 1.4% by end of Q1 2024. The unemployment rate rose to 2.3% in December 2023 and is expected to increase further to 2.6% by Q1 2024.
Monetary Policy: The SNB left its policy rate unchanged at 1.75% in September 2023 after a series of hikes, noting that inflationary pressures have eased slightly. However, the central bank signalled further tightening may still be needed to ensure price stability over the medium-term if high inflation persists. SNB aims to keep rates at 1.75% through Q1 2024 but may raise rates to 2% by Q2 2024 if necessary.
Geopolitical Landscape: Key risks stem from Russia's war in Ukraine, wider Middle East conflicts, and uncertainty over EU relations. However, Switzerland remains committed to providing humanitarian aid and participating in peace negotiations where possible. Switzerland also aims to diversify trade relations to hedge geopolitical risks.
Technical Analysis: The USD/CHF rate stands at 0.8618 as of January 2023. The pair is expected to trade around 0.86 by the end of Q1 2024 and 0.89 in 12 months, according to forecasts. The Swiss Franc remains supported by SNB's relatively hawkish policy stance compared to the Fed. However, some further USD/CHF upside is likely over the medium-term as the Fed continues tightening.
Upcoming Economic Events:
CH Interest Rate : Next: in 50 days
CH Monthly GDP MoM : Next: in 29 days
CH Inflation Rate : Next: in 13 days
CH Unemployment Rate : Next: in 7 days
Japan: On the Path to Economic Recovery Despite Persistent Headwinds
Economic Indicators: Key economic indicators show that Japan's economy is recovering moderately, supported by pent-up demand and the easing of COVID restrictions. However, slowing global growth, supply chain issues, and high inflation continue to pose challenges. The Bank of Japan lowered its 2024 CPI forecast to 2.4% from 2.8% previously, reflecting declining oil prices. It expects inflation to hit 1.8% in 2025. The BoJ also cut its 2023 GDP growth estimate to 1.8% from 2.0% but revised its 2024 GDP outlook upwards to 1.2% on the back of robust domestic demand. Recent data showed Japan's economy contracted 0.7% quarter-over-quarter in Q3 2023, marking its first decline since Q3 2022. Weakness in private consumption, capital expenditures, and net trade drove the fall. However, the economy is projected to grow 0.4% in Q4 2023 and 0.5% in 2024.
Monetary Policy: The Bank of Japan left its key short-term interest rate unchanged at -0.1% in its January 2023 meeting, sticking to its ultra-loose monetary policy stance as it waits for clear signs that inflation is sustainably hitting its 2% target. BoJ Governor Ueda noted growing confidence in achieving the price goal but emphasised policy will initially focus on supporting growth while minimising market disruption. The BoJ slashed near-term inflation forecasts on lower oil prices but expects trend inflation to reach 1.9% in 2024-2025.
Geopolitical Landscape: On the geopolitical front, Japan faces a challenging environment with tensions surrounding China, North Korea, and Russia. It continues deepening strategic partnerships with like-minded democracies to counter rising threats.
Technical Analysis: Technically, USD/JPY remains in an uptrend but has pulled back from the 148 resistance level towards support at 146. The pair is expected to trade in the 144-152 range in the near-term. Economists forecast the exchange rate at 151 by end-2024. In the long run, the yen could depreciate towards the 200-level absent a hawkish shift from the dovish BoJ.
Upcoming Events:
JP Interest Rate : Next: in 48 days
JP Monthly GDP MoM : Next: in 14 days
JP Inflation Rate : Next: in 26 days
JP Unemployment Rate : Next: in 29 days
Australia: Cautiously Optimistic Economic Outlook
Economic Indicators: Key economic indicators show signs of slowing growth but remain resilient overall. GDP grew 2.1% year-over-year in Q2 2023, down from 3.7% in 2022, driven by slowing consumer demand amid high inflation eroding real incomes. However, net migration, investment, and public spending continue supporting growth. Inflation remains elevated at 5.8% in 2023, though moderating. The unemployment rate was 3.6% in September. Growth is forecast to slow further to 1.8% in 2023 and 1.2% in 2024 as policy tightening takes effect.
Monetary Policy: The RBA has aggressively raised rates to curb inflation, taking the cash rate to 4.35% in January 2024. Further modest tightening is likely this year before a prolonged hold as policy works through the economy. Inflation is projected to remain outside the 2-3% target range until late 2025. The AUD has remained relatively stable through the tightening.
Geopolitical Landscape: Key events include increased EU-China economic tensions, the potential election of Donald Trump in the US, and evolving regional relations for Australia. These could impact growth via market sentiment and trade flows. Rebuilding after conflicts often eventually lifts growth.
Technical Analysis: After trading between 0.6169-0.7156 in 2023, AUD/USD rose to 0.66 in January 2024. It faces resistance at 0.6735 (2022 high) and support at 0.6570 (2023 low). Bearish sentiment persists from the downtrend since 2011, targeting 0.63 in 12 months. The ASX200 trades near record highs, boosted by tech stocks.
Upcoming Events
AU Interest Rate : Next: in 6 days
AU Monthly GDP MoM : Next: in 35 days
AU Inflation Rate : Next: in 0 days
AU Unemployment Rate : Next: in 15 days
New Zealand: Cautious Optimism
Economic Indicators: Key economic indicators show New Zealand's economy is slowing down from the strong post-pandemic recovery. GDP contracted 0.3% quarter-over-quarter in Q3 2023, while inflation eased to 4.7% year-over-year in Q4. The unemployment rate rose to 3.9% in Q3 2023. However, business and consumer confidence are increasing, suggesting economic momentum may pick up in 2024. Trading Economics forecasts interest rates stabilising around 5.5%, GDP growth recovering to 0.1% in Q1 2024, and inflation declining to the 2-3% target range by 2025.
Monetary Policy: The RBNZ has raised interest rates aggressively to 5.5% to curb inflation. The central bank indicates rates will remain elevated for some time to ensure inflation returns sustainably to the 1-3% target range. Markets expect a potential rate cut in H2 2024 if data confirms slowing inflation. The RBNZ chief economist recently pushed back against expectations of early cuts, given still-high inflation.
Geopolitical Landscape: No major domestic geopolitical events are expected to significantly impact the economy or forex market. External risks include global growth slowdown, geo-economic fragmentation, and financial stability shocks. These could alter assumptions and require tighter policy.
Technical Analysis: The NZD/USD is trading around 0.61 after rebounding from 2-year lows under 0.60. The pair shows a potential double bottom reversal pattern on the daily chart. However, 0.6140 marks a key resistance level that has capped gains. Stochastic oscillators also suggest upside momentum may be stalling. Trading Economics forecasts the pair rising to 0.62 by end-Q1 2024 and 0.59 in 12 months.
Upcoming Economic Events:
NZ Interest Rate : Next: in 28 days
NZ Monthly GDP MoM : Next: in 49 days
NZ Inflation Rate : Next: in 76 days
NZ Unemployment Rate : Next: in 6 days
Gavin Pearson
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