Moment of Truth: Upcoming Figures to Confirm or Challenge Currency Narratives
Market Analysis for Week Number 09 2024
DERBYSHIRE UK, Feb 28, 2024, Week 9. Welcome to Wednesday. US Q4 GDP figures will signal policy outlooks and growth trends. Thursday sees Canada's GDP, US inflation data, and ECB hints ahead of possible June cuts. Friday features Chinese PMIs, Eurozone inflation, and US manufacturing data.
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Positive Economic Data and Geopolitical Stability Support Bullish USD Outlook
Recent US economic data has been positive with GDP expanding 3.3% in Q4 2023, outpacing forecasts. Non-farm payrolls also beat expectations in January 2024, rising 353K. Meanwhile, inflation eased to 3.1% in January from 3.4% in December. This data aligns with the Trading Economics forecast expecting moderate GDP growth, inflation decline, and steady job gains in 2024.
Additionally, relative geopolitical stability with the US and allies disrupting cyber threats and managing tensions with Russia and China has supported USD stability. Ongoing cooperation between the US and Ecuador on security issues also backs currency resilience.
Upcoming PCE inflation data on Thursday, March 1st will provide critical guidance on potential Fed rate changes. If it shows faster inflation decline, markets may price in potential rate cuts by June. This could undermine the USD in the near-term. However, the positive payrolls and consumer confidence data point to steady growth and inflation moderation in line with the Trading Economics projections for 2024.
Therefore, recent data and geopolitical factors support the bullish USD outlook this quarter. Though a potential surge in PCE inflation could spark short-term USD weakness on increased rate cut bets, the macro backdrop of moderate growth and inflation aligns with the forecast trajectory. This suggests the USD will likely see continued gains in 2024 barring unexpected shocks.
Loonie Faces Headwinds Amid Dovish Shift
The Canadian dollar has weakened past 1.35 per USD in late February as rising odds of imminent rate cuts by the Bank of Canada add headwinds. The loonie faces additional pressure from pessimistic outlooks for foreign capital inflows as oil prices retreat on souring global demand.
Canada's January inflation dropped to 2.9%, far below the 3.3% expected, supporting doves at the BoC and lifting rate cut bets for Q2 2024. This aligns with the BoC's recent emphasis that high rates are slowing growth. If the March 8th jobs report also shows cooling, cuts could come sooner.
Upcoming OPEC+ decisions on March output amid shaky demand suggest further downside risks for oil. However, rising geopolitical tensions in Libya, Yemen, and the Middle East pose upside supply risks. Still, with the global economy slowing, oil may struggle to sustain recent gains.
Overall, the loonie looks vulnerable to further losses as markets bet on easing from the BoC while Canada's key oil exports face demand headwinds. But with geopolitical tensions simmering, oil and the loonie could see intermittent boosts on supply squeezes.
Euro faces headwinds amid slowing growth and hawkish ECB
The euro is facing headwinds as the Eurozone economy shows further signs of slowing while the ECB maintains a hawkish stance. Recent PMI data indicates the pace of the bloc's business activity contraction eased in February, with the composite output index rising to 51.1 from 50.3. However, S&P Global warned that the improvement reflects how activity and demand are stabilising at very weak levels amid high inflation and interest rates rather than signalling an imminent return to growth.
Upcoming releases like German GDP data on March 8 and Eurozone CPI figures on March 1 will provide critical insights into the health of the economy and the trajectory of inflation. The ECB meeting on March 7 also looms large. While markets have tempered expectations for rate cuts this year, ECB President Lagarde said more evidence is needed that inflation is moving toward the 2% target before policymakers shift their hawkish stance.
So while the euro has rebounded from its sub-$1.05 lows, upside appears limited given the challenging economic environment and the possibility of further monetary tightening from the ECB. The currency also remains sensitive to gas prices and the war in Ukraine.
Trading Economics forecasts the EURUSD dropping to 1.07 by end-March and 1.05 in 12 months as currency markets price in the headwinds facing the Eurozone economy. However, any positive surprises in upcoming data or a swift turn in the ECB's rhetoric could boost the euro. Still, the currency likely faces a bumpy road ahead this year.
Pound Outlook Muted Despite Improving Data
The British Pound has seen muted gains this week, consolidating above $1.265 despite improving economic data. Service sector activity expanded at the fastest pace since May 2022 in the February PMI report, and inflation remained steady at 4% in January, below expectations. However, GBP only saw marginal gains as investors remain cautious on the growth outlook.
GDP contracted by 0.3% in Q4 2023, confirming technical recession after a 0.1% fall in Q3. However, PMI and inflation data suggest the economy may be turning a corner. If the service sector uptick feeds through to hard data on retail sales and unemployment, it would support the case for rate cuts later this year.
The BoE left rates unchanged at 5.25% in February but dropped guidance on further tightening. As inflation pressures ease, two members called for a 25bps cut, though risks remain skewed to the upside. Supply tensions and robust wage growth could keep the central bank wary of easing policy prematurely.
Upcoming data, including February CPI on March 1st and the March BoE decision on March 21st, will give further indications if lingering inflation allows room for rate cuts. For now, muted pound gains reflect investor caution on jumping the gun on policy easing.
Geopolitical tensions in the Red Sea and domestic opposition to joining AUKUS’ Pillar II pose additional downside risks. On balance, the muted pound outlook could persist in the near term absent a significant downturn in price pressures.
Cautious optimism for the Swiss franc amid global uncertainty
The Swiss franc has shown resilience in recent weeks, appreciating slightly against the US dollar as investors seek safe haven assets amid global uncertainty. Upcoming economic events, shifting geopolitics, and evolving market sentiment could continue to impact currency movements going forward.
Recent Swiss GDP and inflation data indicates the economy remains stable, if slowing, while the SNB has signalled steady policy rates in the near term. This has supported the franc. However, with major trading partners like the EU facing potential recession, Swiss exports may suffer. And if global growth deteriorates further, the franc's safe haven status could strengthen it considerably.
Meanwhile, gold prices have fallen in 2024 as inflationary pressures ease globally. But geopolitical tensions persist surrounding Ukraine, keeping some demand for haven assets. If inflation spikes again or conflicts worsen, gold and the franc could rise in tandem.
For now, analysts expect the franc to continue trading in a range near 0.88 USD through early March. But unpredictable factors abound, from the Russia-Ukraine war and global central bank policies to economic data and Swiss monetary decisions. With risks still elevated, the franc likely faces both upside and downside potential in the months ahead. Maintaining cautious optimism seems warranted for those exposed to the currency.
Yen faces ongoing pressure amid recession, easing inflation
The Japanese yen was subdued above 150 per dollar as the country unexpectedly fell into a technical recession in the fourth quarter. This bolsters bets that the Bank of Japan would maintain ultra-loose monetary policy for longer. Meanwhile, January inflation slowed to 2.2%, below expectations and the lowest since March 2022, further reducing prospects of policy tightening.
Upcoming economic data including Friday's industrial production, retail sales and unemployment figures could provide more evidence on recession impacts. If weak, this would extend yen weakness. Additionally, Tuesday’s final fourth quarter GDP estimate could confirm negative growth.
Geopolitically, recent developments like port calls in Cambodia and a legal dispute over wartime compensation have had limited currency impacts. However, if tensions escalate with South Korea, there could be some safe-haven yen buying.
Looking ahead, March’s inflation data and second estimate GDP on March 10 will offer critical guidance on economic conditions. Dovish BOJ policy and carry trades are likely to keep pressuring the yen irrespective of data.
The USDJPY is expected to trade at 150.61 by quarter-end and 154.52 in 12 months per Trading Economics. This aligns with recession and monetary policy outlooks. Though inflation appears to be easing faster than forecast, driving potential for earlier tightening, baseline projections seem reasonable. Near-term data and geopolitics present upside currency risks but are unlikely to significantly shift the yen’s bearish trajectory.
Mixed Outlook for Australian Dollar on Moderating Inflation and Geopolitical Uncertainties
The Australian dollar has weakened over the past month due to moderating inflation figures that reduced rate hike expectations. However, geopolitical uncertainties pose risks.
Inflation slowed to 4.1% in Q4 2023, the lowest since Q4 2021, driving the Australian dollar down on reduced likelihood of further RBA rate hikes. The RBA indicated it needs more confirmation of descending inflation before ruling out hikes. Meanwhile, Q3 GDP growth eased to 0.2%, the softest expansion since Q3 2022. If the upcoming March 6th GDP report shows a rebound over 0.3% forecast, it may support the Australian dollar.
Geopolitical factors present uncertainties. Canberra aims to pressure Beijing on unfulfilled trade promises during an upcoming February 26-29th WTO meeting. Tensions could resurface regarding Beijing’s relations with Pacific nations like Solomon Islands. However, the prospective Indonesia-Australia defence pact could mitigate regional risks.
Market sentiment has been cautious amidst inflation and geopolitical uncertainty. The ASX 200 index rose over 2023 but faced recent volatility. Declining bond yields signal reduced rate hike bets.
The established forecast expects the Australian dollar to edge down to 0.63 USD in 12 months. However moderating inflation driving lower rate expectations align with this prediction. Lingering global recession worries pose downside risks. Meanwhile, political and regional stability could provide upside potential. The currency outlook remains mixed on conflicting inflation and geopolitical factors.
New Zealand Dollar Faces Headwinds Amid Global Uncertainty
The New Zealand dollar has weakened 0.06% against the US dollar since the start of 2024, trading around 0.6150. This comes despite the Reserve Bank of New Zealand holding rates steady at 5.50% in its February meeting, matching expectations.
While lower than peak inflation of 7.2%, the 4.7% inflation rate in Q4 2023 remains above the 1-3% target range. This has led the central bank to maintain a less dovish stance than expected, forecasting rates to remain elevated through 2024. Unemployment has also ticked up to 4.0% in Q4 2023.
However, New Zealand’s economic growth contracted 0.3% quarter-over-quarter in Q3 2023. Slowing global growth, especially in key trading partner China, presents headwinds.
On the geopolitical front, domestic opposition is mounting against New Zealand potentially joining the AUKUS security pact. This could raise political uncertainty.
Crude oil prices have climbed 9.75% year-to-date to $77.69/bbl. As an oil importer, higher prices could dampen New Zealand’s terms of trade.
Upcoming data releases such as the Q4 2023 GDP figure on March 20 could provide further evidence on the health of the economy. If growth remains lacklustre, easing rate hike expectations could weigh on the New Zealand dollar.
Overall, while the currency has held relatively steady in 2024, lingering inflation and external risks point to potential weakness ahead. The central bank’s reduced hawkishness also indicates there may be less room for rate differentials to support the Kiwi dollar moving forward.
Gavin Pearson
Retail trader since 2008
Specialises in forex
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