Market Jitters after US Inflation Surprise
Market Analysis for Week Number 02 2024
DERBYSHIRE UK, Jan 12, 2024, Week 2. Hello and welcome. Inflation surprise in the US (3.4%) threatens early Fed cuts, buoying USD vs. EUR & GBP. BoJ clings to loose policy, weakening JPY. Cautious ECB keeps EUR on edge, BoE tiptoeing unsettles GBP. Loonie caught in tug-of-war between US & domestic data.
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Forex Market Themes
US Inflation Rates Exceed Expectations: The US CPI increased to 3.4% in December, higher than anticipated. This development reduces the likelihood of early Federal Reserve rate cuts, bolstering the US dollar against various currencies, including the Euro (EUR) and the British Pound (GBP).
Bank of Japan's Monetary Policy Outlook: Japan’s core inflation rate and wage growth data indicate ongoing economic challenges, suggesting the Bank of Japan may continue its ultra-loose monetary policy. This impacts the Japanese Yen (JPY), potentially leading to its depreciation.
European Central Bank (ECB) Policy Signals: The ECB's stance on interest rates, influenced by regional inflation and economic data, affects the Euro (EUR). Recent statements indicate a cautious approach to rate cuts, potentially supporting the Euro's stability.
Bank of England (BoE) Rate Cut Expectations: The UK's economic resilience and Governor Bailey's comments suggest a cautious approach to interest rate changes, impacting the British Pound (GBP). Market anticipation of BoE's monetary policy affects GBP's strength.
Canadian Economic Indicators: The Canadian Dollar (CAD) is influenced by domestic economic data, such as employment rates and trade balance, and external factors like US policy shifts. The recent US inflation data and Canadian bond yield trends are key drivers of CAD's direction.
Macroeconomic Snapshot
UNITED-STATES: In late 2023, the US economy showed mixed signs, with slower GDP growth and decreasing inflation, leading to expectations of Federal Reserve rate cuts in 2024, which initially weakened the Dollar. Despite these headwinds, a strong labour market and higher retail sales provided support, causing market volatility and an uncertain outlook for the Dollar. Forecasts predict a continued economic slowdown and lower inflation in 2024, suggesting a potentially weaker Dollar. However, ongoing job growth and a robust holiday shopping season could stabilise the Dollar, resulting in a more balanced and possibly stable trend in the upcoming months. The Dollar's trajectory is largely influenced by changing expectations about Federal Reserve rate cuts, fueled by a mix of economic factors including varying inflation rates and solid labour market data.
EURO-AREA: In late 2023, the Euro experienced volatility due to mixed economic indicators and central bank actions. An unexpected GDP contraction in the Eurozone and rising inflation, along with hawkish European Central Bank (ECB) rhetoric, initially boosted the Euro with expectations of continued rate hikes. However, resilient labour markets and falling energy prices, combined with dovish signals from the US Federal Reserve, later pressured the Euro downwards. Trading Economics predicts slower GDP growth and lower inflation in 2024 for the Eurozone, suggesting a possible weakening of the Euro. Despite this, a strong labour market and potential consumer spending rebound could provide stability, leading to a more nuanced and possibly range-bound Euro. The Euro's direction is heavily influenced by fluctuating expectations of ECB monetary policy, driven by diverse economic factors including inflation rates, regional economic performance, US inflation data, and Federal Reserve policy changes. Geopolitical risks, such as the Ukraine conflict and potential energy supply disruptions, add further complexity to the Euro's future trajectory.
UNITED-KINGDOM: In late 2023, the British Pound experienced significant volatility due to mixed economic signals and varying central bank actions. A surprising contraction in Q3 GDP, reduced business investment, and high inflation initially raised expectations of continued rate hikes by the Bank of England (BoE), supporting the Pound. The BoE's focus on restrictive policy further bolstered this trend. However, a strong labour market, better-than-expected retail sales, and a dovish shift by the US Federal Reserve led to reduced expectations for rate hikes, weakening the Pound. Trading Economics forecasts a slowing GDP and decreasing inflation in 2024, indicating a potential shift towards rate cuts, which could further weaken the Pound. Nonetheless, a resilient labour market and possible boosts in retail spending could provide balancing factors, leading to a more complex and possibly stable Pound narrative. The Pound's direction is largely influenced by changing expectations of BoE's monetary policy, driven by factors including UK GDP, consumer credit, housing market trends, US inflation data, and Federal Reserve decisions. Uncertainties in the UK political scene and external risks, such as the Ukraine conflict and potential energy supply issues, add to the complexity of the Pound's future path.
JAPAN: In late 2023, the Japanese Yen's performance was closely linked to the Bank of Japan's (BoJ) continued ultra-loose monetary policy, amidst a contracting economy and balancing factors like decreasing inflation and a strong labour market. The BoJ's reaffirmation of its dovish stance in December, even after an earthquake and amidst global monetary tightening, initially boosted the Yen against the Dollar due to anticipated policy differences. However, fears of a recession, highlighted by Q3 GDP contraction, and speculation about a future shift in BoJ policy towards normalisation, placed downward pressure on the Yen. Although easing inflation and robust labour conditions provided some support, these were overshadowed by factors like mixed global economic data and increasing US Treasury yields, leading to further Yen weakening. Trading Economics anticipates potential policy easing in 2024 and continued economic challenges, suggesting further depreciation of the Yen. Nevertheless, unexpected rises in inflation or wage growth, along with a possible dovish shift by the US Federal Reserve, could offer balancing influences, potentially leading to a more stable Yen. The recent earthquake adds another layer of uncertainty, potentially affecting BoJ's future policy decisions and complicating the Yen's future direction. The Yen's path is largely affected by the BoJ's monetary policy, varying inflation rates, market speculation about policy changes, and external influences such as global economic trends and the earthquake's impact on Japan's economy.
CANADA: In late 2023, the Canadian Dollar (Loonie) faced a complex situation marked by mixed economic indicators. It was weighed down by a contracting economy and high inflation, but supported by decreasing core inflation and a strong labour market. The Bank of Canada's (BoC) decision to pause interest rate hikes at a 22-year peak initially boosted the Loonie, but concerns about an economic slowdown, highlighted by a Q3 GDP contraction, and anticipation of future rate hikes exerted downward pressure. Although easing core inflation provided some relief, rising mortgage rates due to previous aggressive rate hikes exacerbated inflation worries. The Loonie also contended with external factors like mixed US economic data and the Federal Reserve's tightening stance. Projections from Trading Economics indicate a potential slowdown in GDP growth and moderation in inflation in 2024, suggesting a weaker Loonie in the future. However, improvements in wage growth and a faster-than-expected decrease in core inflation could lead to a delay in BoC rate hikes, potentially strengthening the Loonie. The volatile oil market is a significant variable, with higher prices possibly bolstering the Loonie but also increasing inflationary pressures. Additionally, global geopolitical issues, especially the war in Ukraine and potential energy supply disruptions, add further complexity to the Loonie's trajectory. Overall, the Canadian Dollar's direction is heavily influenced by crude oil price fluctuations, domestic economic data, unemployment rates, and external pressures from US economic trends and Federal Reserve policy decisions.
Key Events To Trade
Friday, January 12, 2024: USPPI MoM DEC, US Core PPI MoM DEC (US): Higher than expected data could strengthen USD on hawkish Fed bets, potentially weakening EUR and CAD due to their respective economic slowdowns.
Friday, January 12, 2024: GB GDP MoM NOV, GB GDP 3-Month Avg NOV (UK): GBP - Positive data could buoy GBP, while a contraction might weaken it against risk-sensitive currencies like CAD and AUD.
Wednesday, January 17, 2024: US Retail Sales MoM DEC, US Import Prices MoM DEC (US): USD, EUR, CAD - Strong retail sales and rising import prices could strengthen USD, potentially impacting EUR and CAD depending on their respective economic data later in the week.
Wednesday, January 17, 2024: EA Inflation Rate YoY Final DEC (EU): EUR - In line or lower inflation could boost EUR, while higher figures might weaken it against safe-haven currencies like USD and CHF.
Gavin Pearson
Retail trader since 2008
Specialises in forex G7 currencies
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 5.8% in 2023 H1
Forex focused
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Disclaimer
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