Inflation, Interest Rates, and Optimism
Market Analysis for Week Number 04 2024
DERBYSHIRE UK, Jan 25, 2024, Week 4. Welcome to Thursday. The ECB Interest Rate Decision today will be a critical moment for EUR pairs. The ECB's stance on interest rates could either give the Euro a leg-up or weigh it down. Then, tomorrow, the US Core PCE Price Index MoM release will influence USD pairs. This inflation indicator might hint at future rate hikes, possibly bolstering the USD. Lastly, on January 30, the Euro-Area's GDP Growth Rate QoQ Flash report is set to impact EUR pairs. This data reflects the Eurozone's economic health, with higher GDP growth usually boosting the Euro. As these events unfold, expect related narratives and currency movements to keep traders on their toes, navigating through a market influenced by policy decisions and economic indicators.
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Macroeconomic Snapshot
United States: Navigating Inflation and Interest Rate Adjustments: The United States economy is navigating a period of inflationary pressures and interest rate adjustments. The Federal Reserve has maintained the fed funds rate at 5.25%-5.5% but has signalled potential cuts in 2024, reflecting a cautious approach to managing economic growth and inflation. The economy expanded by an annualised 4.9% in Q3 of 2023, with consumer spending as a significant contributor, despite a slowdown in services spending. The labour market added 216,000 jobs in December 2023, surpassing expectations and contributing to a robust employment landscape. However, the unemployment rate remained at 3.7%, with projections indicating a slight rise to 4.3% by the end of 2024. Wage growth has been steady, with wages up 5.4% year-on-year as of December 2023. Inflation, a key concern for the economy, saw the Consumer Price Index (CPI) rise to 3.4% in December 2023, with core inflation at 3.9%. The Federal Reserve's projections suggest a moderation of inflation, with Personal Consumption Expenditures (PCE) inflation expected to be lower in 2023 and 2024 compared to previous estimates. Retail sales showed resilience, with a 0.6% increase in December 2023, indicating continued consumer confidence and spending. The economic outlook for the next six weeks suggests a cautious optimism, with modest growth expected as the Federal Reserve navigates the dual mandate of controlling inflation and supporting employment.
Canada: Steady Growth with Monetary Policy Vigilance: Canada's economic outlook for the next six weeks is characterised by steady growth and vigilance in monetary policy. The Bank of Canada held its target for the overnight rate at 5% in December 2023, reflecting a commitment to moderating spending and addressing inflationary pressures. The Canadian GDP contracted by 0.3% in Q3 of 2023, indicating the impact of higher interest rates on the economy. The labour market in Canada has shown signs of softening, with the unemployment rate at 5.8% in December 2023, unchanged from the previous month and slightly below expectations. Wage growth has been solid, with average weekly earnings increasing. Inflation remains a concern, with the annual rate rising to 3.4% in December 2023, in line with the Bank of Canada's expectations of inflation remaining close to the 3.5% mark through the middle of the next year. The central bank has expressed readiness to raise the policy rate further if necessary to combat inflation. International trade continues to be a vital component of Canada's economy, with the United States being its largest trading partner. The economic indicators suggest that Canada will continue to experience steady growth, with a focus on balancing demand and supply, inflation expectations, wage growth, and corporate pricing behaviour.
Euro Area: Gradual Recovery Amid Inflation Concerns: The Euro Area's economic outlook for the next six weeks is characterised by a gradual recovery, with GDP growth expected to slow down from 3.4% in 2022 to 0.6% in 2023, before recovering to 0.8% in 2024. This recovery is underpinned by the gradual resurgence of private consumption as uncertainty and inflation decline, and real incomes and confidence improve. However, higher energy prices, uncertainty effects, and international spillovers are expected to weaken economic growth. The labour market remains tight, with the unemployment rate at 6.4%. Labour shortages are mainly driven by lower average hours worked, despite strong job creation. This trend in lower average hours worked is observed in most sectors and for both men and women, and is considered the main reason for current labour shortages. Inflation is a significant concern, with the Euro Area annual inflation rate rising to 2.9% in December 2023, up from 2.4% in November 2023. This rise in inflation is mainly due to higher prices for food, alcohol & tobacco, and services. The Euro Area Inflation Rate is projected to trend around 2.10 percent in 2025. Monetary policy in the Euro Area is managed through the European Central Bank (ECB), aiming to ensure price stability. However, the IMF has urged Euro Area governments to help the ECB by cutting spending. National governments control other economic policy areas, including fiscal policy concerning government budgets, tax policies, and structural policies. In terms of international trade and finance, the Euro Area's foreign demand growth is expected to decline by 1.2 percentage points in 2024.
United Kingdom: Steady Growth Amid Labour Market Challenges: The United Kingdom's economic outlook for the next six weeks is characterised by steady growth, with GDP growth expected to slow down from 3.4% in 2022 to 0.6% in 2023, before recovering to 0.8% in 2024. This recovery is underpinned by the gradual resurgence of private consumption as uncertainty and inflation decline, and real incomes and confidence improve. However, higher energy prices, uncertainty effects, and international spillovers are expected to weaken economic growth. The labour market remains tight, with the unemployment rate at 6.4%. Labour shortages are mainly driven by lower average hours worked, despite strong job creation. This trend in lower average hours worked is observed in most sectors and for both men and women, and is considered the main reason for current labour shortages. Inflation is a significant concern, with the Euro Area annual inflation rate rising to 2.9% in December 2023, up from 2.4% in November 2023. This rise in inflation is mainly due to higher prices for food, alcohol & tobacco, and services. The Euro Area Inflation Rate is projected to trend around 2.10 percent in 2025. Monetary policy in the Euro Area is managed through the European Central Bank (ECB), aiming to ensure price stability. However, the IMF has urged Euro Area governments to help the ECB by cutting spending. National governments control other economic policy areas, including fiscal policy concerning government budgets, tax policies, and structural policies. In terms of international trade and finance, the Euro Area's foreign demand growth is expected to decline by 1.2 percentage points in 2024.
Japan: Navigating Uncertainty with Cautious Optimism: Japan's economy experienced a contraction of 0.7% in Q3 of 2023, marking the first GDP contraction since Q3 of 2022, due to elevated cost pressures and global headwinds. Despite this, the economy is expected to grow by 0.40% by the end of the current quarter, with a long-term projection of around 0.50% in 2024 and 0.40% in 2025. The annualised growth rate was 6% in the second quarter of 2023, indicating a recovery from the pandemic. The unemployment rate in Japan stood at 2.5% in November 2023, unchanged from the previous month and the lowest since January of the same year. The jobs-to-applications ratio was at 1.28, suggesting more job openings than job seekers. Inflation in Japan continues to run above the Bank of Japan's (BoJ) 2% target, with headline inflation at 3.3% in October on a year-over-year basis. The BoJ has maintained its key short-term interest rate at -0.1% and aims to achieve price stability with wage increases. The central bank has indicated a willingness to take extra easing measures if necessary. Japan's trade balance has been affected by a slower rise in exports compared to imports. The country's economic model is heavily reliant on exports, with a significant electronics and automobile industry.
Switzerland: Steady Growth Amidst Inflation Concerns: Switzerland's GDP expanded by 0.3% in Q3 2023, rebounding from a slight fall in Q2. The economy is expected to grow by 0.40% by the end of the current quarter, with a long-term forecast of around 0.70% in 2024 and 0.50% in 2025. The services sector was the main driver of this growth. The Swiss unemployment rate increased to 2.3% in December 2023, the highest since April 2022. The youth unemployment rate was recorded at 2.2%, with a slight increase in the number of young employed. Inflation in Switzerland slowed to 1.4% in November, the lowest rate since October 2021. The Swiss National Bank (SNB) kept its key policy rate unchanged at 1.75% and expects average annual inflation of 2.1% for 2023, 1.9% for 2024, and 1.6% for 2025. The SNB is prepared to adjust its monetary policy to ensure price stability. Switzerland's economy is characterised by a strong services sector and a significant financial centre, contributing 9.0% of total GDP. The country has a stable political situation and favourable business environment, attracting investors. The EU is Switzerland's main trading partner, with a significant portion of imports and exports between them.
Australia: Steady Growth Amid Inflation Concerns: The Australian economy demonstrated resilience in the face of global challenges, with a GDP growth rate of 0.2% in Q3 2023, albeit slower than the 0.4% growth in Q2 2023. The services sector continues to dominate the economy, accounting for 72% of overall GDP, while agriculture and mining significantly contribute to exports. The country's GDP growth rate is projected to trend around 0.50% in 2024 and 0.60% in 2025. The labour market remains robust, with the unemployment rate declining as the economy grows. However, inflation has been a concern, driven by excessive domestic demand rather than supply shocks from abroad. The Reserve Bank of Australia (RBA) maintained its cash rates at 4.35% in its final meeting of the year, with the interest rate projected to trend around 3.85% in 2024 and 2.85% in 2025. Fiscal pressures are on the horizon due to population growth and other factors. Australia's gross debt is forecast to reach $1,138 billion (51.6% of GDP) at 30 June 2024. Despite this, Australia's debt level is still low compared to other countries. In terms of international trade, Australia's exports of resources account for 61.5% of the total, with China being the largest trading partner at 27.3%. The country's economic success in recent years has been based on the mining sector, which contributes 13.5% of GDP.
New Zealand: Economic Stability Amid Potential Slowdown: New Zealand's economy grew by 4.9% in 2021, with real GDP growing by 5.1% on an annual basis in Q1 2022. However, growth is expected to slow to around 1% y/y in 2023 and 2024, with the possibility of a technical recession. The country's macroeconomic frameworks guide decision-making and policy choices around fiscal and monetary policy, impacting indicators such as GDP growth, employment, and inflation. The labour market has been supported by the country's macroeconomic stability, which also supports New Zealanders' income and living standards. However, persistently high inflation and wage growth could compel the Reserve Bank of New Zealand (RBNZ) to tighten monetary policy further, especially if fiscal policy does not consolidate as planned. Fiscal policy has been expansionary, with the RBNZ increasing the policy rate by 525 basis points to 5.50% since October 2021. The country's GDP per capita was USD 48,409 in 2023, with nominal GDP expected to grow by 4.7% annually. In terms of international trade, New Zealand's external balance has deteriorated significantly due to restrictions and disruptions in global supply chains. The country's economic stability and business-friendly environment have helped it fare better than the OECD average on several indicators, including dealing with construction permits, registering property, getting credit, protecting minority investors, paying taxes, enforcing contracts, and resolving insolvency.
Forex Market Sentiment
DXY: Bullish Momentum Amid Rising Treasury Yields: The U.S. Dollar Index (DXY) has exhibited a bullish trend over the past six days, reaching a new yearly high around the 103.70 zone. Currently, the index trades at 103.22, bolstered by rising Treasury yields and a weaker Euro. The market is keenly observing the Federal Reserve's interest rate decisions, with upcoming economic data releases such as fourth-quarter GDP growth and the PCE price index being pivotal. The Euro's weakness, as a significant component of the DXY, has a substantial impact on the index. Traders are now focused on whether the Fed will begin reducing interest rates, which is a critical factor for future market and economic trends. Trading Economics anticipates the DXY to maintain its bullish trend, influenced by market dynamics and forthcoming reports.
USD/CAD: Anticipated Rate Cut Influences Bearish Sentiment: The USD/CAD pair is under the influence of dovish shifts in the Bank of Canada's stance, with a potential rate cut expected in the second quarter. This has applied downward pressure on the Canadian Dollar. The strength of the U.S. Dollar, as reflected in the DXY's bullish trend, could exert additional downward pressure on the Canadian Dollar. The sentiment for USD/CAD will likely evolve based on the actual implementation of the anticipated rate cut by the Bank of Canada, which could lead to further weakening of the Canadian Dollar. Trading Economics forecasts that the pair will continue to be influenced by these factors.
EUR/USD: Awaiting Dollar Departure: The EUR/USD pair is trading slightly below 1.0900 in a choppy session. The Eurozone's economic situation is complex, with stagnation, transition, and geopolitical factors at play. The absence of significant data releases and a generally upbeat market mood have prevented the U.S. Dollar from gaining strength, aiding the pair in limiting its losses. The market is awaiting key economic events, such as a speech by ECB President Lagarde, and resisting the temptation to push back market pricing of rate cuts. The consensus is that the dollar will decline this year, which could influence the EUR/USD pair. Trading Economics forecasts the price to be at 1.08 by the end of this quarter.
GBP/USD: Consolidating Above 1.2700: The GBP/USD pair is consolidating slightly above 1.2700, supported by a risk-on environment. However, rising tensions in the Red Sea could increase demand for safe-haven assets, potentially capping the upside of the pair. The pound has shown strength against the dollar following a survey indicating that business activity in the UK is outpacing that of major European economies, which supports the case for British rates to stay higher for longer. The sentiment for GBP/USD may evolve based on upcoming economic events and expectations of adjustments in Federal Reserve policies. Trading Economics forecasts the price to be at 1.08224 by the end of this quarter.
USD/CHF: Bullish Sentiment Amid Economic Optimism: The USD/CHF pair has been on an upward trajectory, moving away from the 0.92 level and potentially towards the 0.94 mark. Positive U.S. economic data, particularly the recent decrease in jobless claims, has driven this bullish sentiment. The Swiss Franc's correlation with the Euro and the Eurozone's economic stagnation have also contributed to the USD strengthen against the CHF. Market sentiment may be influenced by upcoming U.S. GDP data and potential rate cuts by the European Central Bank. Trading Economics forecasts the USD/CHF to continue its upward trend.
USD/JPY: Bearish Outlook Amid Anticipated Policy Shifts: The USD/JPY pair has seen a downward trend, moving away from the 148.3 level and potentially towards the 146.6 mark. Hawkish comments from the Bank of Japan have raised expectations for a stimulus exit as early as March, contributing to the bearish sentiment. The U.S. dollar's recent pullback against the yen has also influenced this trend. Market sentiment may be influenced by the Bank of Japan's monetary policy decisions and the U.S. Federal Reserve's actions. Trading Economics forecasts the USD/JPY to continue its downward trend.
AUD/USD: Cautious Optimism Amid Economic Uncertainty: The Australian Dollar (AUD) has shown signs of recovery against the US Dollar (USD), reaching the 200-day and 50-day Exponential Moving Averages (EMAs). The AUD is currently moving away from the significant support level of 0.65, indicating a potential upward trend. This recovery is influenced by fluctuating risk appetite and the health of major Asian resource importers, which are currently experiencing economic slowdowns. The Federal Reserve's likely rate cuts could influence the AUD's performance. However, if the AUD breaks down below the 0.65 level, it could lead to a move down to the 0.6350 level. Trading Economics forecasts that the AUD/USD will continue to trade based on these factors.
NZD/USD: Modest Gains Amid Economic Concerns: The New Zealand Dollar (NZD) has posted modest gains against the US Dollar (USD), moving above the mid-0.6000s. Despite these gains, the upside of the NZD/USD pair remains capped due to concerns about a potential downturn in a slowing economy and subdued investor sentiment in China. The NZD's performance is affected by risk appetite and the health of major Asian economies, particularly China. The Federal Reserve's potential rate cuts could influence the NZD's performance. If the NZD/USD pair breaks down below the mid-0.6000s, it could lead to further losses. Trading Economics forecasts that the NZD/USD will continue to trade based on these factors.
Key Events
January 25, 2024 - ECB Interest Rate Decision (Euro-Area): Impact on EUR pairs. ECB's decisions on interest rates significantly affect the Euro's strength. Hawkish stance might boost EUR, dovish stance could lead to depreciation.
January 26, 2024 - Core PCE Price Index MoM (US): Impact on USD pairs. As a key indicator of inflation, higher readings might imply upcoming rate hikes, strengthening USD.
January 30, 2024 - GDP Growth Rate QoQ Flash (Euro-Area): Impact on EUR pairs. Reflects the health of the Eurozone economy. Higher GDP growth is typically positive for the EUR.
January 31, 2024 - Fed Interest Rate Decision (US): Impact on USD pairs. The Fed’s rate decision is crucial for USD valuation. Increases in rates typically bolster USD.
February 1, 2024 - BoE Interest Rate Decision (UK): Impact on GBP pairs. The BoE’s decision influences GBP's value. Rate hikes can lead to GBP appreciation.
February 2, 2024 - Non-Farm Payrolls (US): Impact on USD pairs. This key employment data can significantly move USD, with higher job additions potentially strengthening the currency.
Gavin Pearson
Retail trader since 2008
Specialises in forex
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Regular contributor to FXStreet.com analysis and education pages
Returned 27% in 2022 and -2.7% in 2023
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Disclaimer
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Trading involves risk, and you could lose money
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