Navigating the Turning Tide - Moderating US Growth and Gradual Policy Easing
Market Analysis for Week Number 05 2024
DERBYSHIRE UK, Jan 29, 2024, Week 5. Welcome to Monday. The US economy continues to show moderating growth and cooling inflation, supporting expectations for gradual Fed policy easing beginning in Q2. Key events impacting markets this week include the FOMC rate decision, US jobs report, and services PMIs. Meanwhile, the UK faces persistent economic headwinds with markets eyeing the BoE policy meeting. However, Switzerland and Japan offer cautiously optimistic outlooks. Broadly, stabilising conditions may aid risk appetite, but risks remain tilted to the downside.
Trading involves a possibility of losing money therefore all decisions in market speculation are undertaken at your own financial risk.
United States: Moderating Growth and Inflation Support Gradual Policy Easing
The US economy expanded at a faster than expected 3.3% annualised rate in Q4 2023, bringing full year growth to 2.5%. However, growth is projected to moderate to 0.5% in Q1 2024 as the effects of interest rate hikes impact the economy. Inflation has steadily declined from peak levels, with core PCE reaching 2.9% in December, supporting expectations for gradual Fed policy easing beginning in Q2 2024. The projected 75 bps of cuts in 2024 and solid economic fundamentals should provide support for the US dollar, although the currency index DXY may face some near-term pressure from shifting rate cut expectations.
Economic Indicators: In Q4 2023, GDP growth accelerated while inflation slowed, beating forecasts. The Fed kept rates steady in December and lowered its 2024 median dot plot to 4.6%, signalling potential cuts. This led markets to price in a 48% chance of a March cut, down from 86% in December. The benchmark rate is expected to end Q1 2024 at 5.5% before beginning its descent to 4.75% by year end. US Q4 GDP expanded 3.3% annualised, above 2% forecasts, bringing 2023 full year growth to 2.5%. However inflation continued its downward trajectory, with core PCE reaching 2.9% year-over-year in December, below expectations of 3%. Retail sales also beat forecasts, rising 0.6% month-over-month in December. Nonfarm payrolls increased by 216,000 in December, surpassing estimates. The unemployment rate held at 3.7%.
Monetary Policy: At the December 2023 meeting, the Fed left rates unchanged at 5.25%-5.5%, as widely expected. The dot plot showed a 2024 median year-end rate of 4.6%, 75 bps below the September projection, signalling potential cuts. Fed Chair Powell stated recent data suggests economic growth has slowed, and inflation has eased but remains elevated.
Geopolitical Landscape: Key events impacting investor confidence and the US economy include the ICJ ruling measures against Israel over Palestinian territories, the Venezuela crisis threatening regional stability, Republican debates over tying Ukraine aid to the US border, and the launch of a Federal Trade Commission AI partnerships inquiry.
Technical Analysis: The DXY rose to over 6-week highs around 104 in January before retreating to 103.6 as shifting rate cut expectations weighed. The index is expected to trade around 103.16 by the end of Q1 2024 and 106.38 in 12 months.
Upcoming Economic Events:
- Jan 31: FOMC Rate Decision
- Feb 1: ISM Manufacturing PMI (Volatility Level - High)
- Feb 2: Nonfarm Payrolls (Volatility Level - High)
- Feb 5: ISM Non-Manufacturing PMI (Volatility Level - Medium)
Canada: Navigating Global Headwinds
The Bank of Canada has kept interest rates unchanged at 5% in January 2024 as it remains concerned about stubborn core inflation. Tighter monetary policy has slowed economic activity, with contracting business investment and easing labour markets. However, the economy is projected to return to growth later this year. Headline inflation is seen stabilising near 3% in the first half of 2024 before gradually declining to the 2% target by 2025. Meanwhile, the USD/CAD currency pair has strengthened to 1.34 on global growth optimism and rising oil prices. Further appreciation is expected on diverging monetary policy paths.
Economic Indicators: Canada's GDP contracted 0.3% in Q3 2023, indicating the dampening impact of higher interest rates. However, the economy is forecast to return to mild growth of 0.5% by end-2024. Inflation rose to 3.4% in December 2023 due to rebounding gasoline costs. But it should ease to 2.7% by end-Q1 2024 and 2% in 2025. The unemployment rate held at 5.8% in December 2023, signalling some labour market softening.
Monetary Policy: The Bank of Canada left its benchmark rate unchanged at 5% in January 2024, concerned about persistent core inflation. While restrictive policy has slowed growth, inflation risks remain, warranting rate hikes if necessary. Rates are expected to trend down to 3% by 2025.
Geopolitical Landscape: Heightened Middle East tensions, a Russian oil export slowdown, and recovering demand in the U.S. and China have lifted crude prices. This supports the CAD despite some global growth headwinds. Canada also faces trade policy uncertainty with the U.K. and some overseas friction over domestic affairs.
Technical Analysis: The USD/CAD rate has strengthened to 1.34 in January 2024 on increased risk appetite and rising oil prices. The currency pair is expected to appreciate further to 1.38 in the next 12 months as the BoC and Fed policy paths diverge.
Upcoming Economic Events:
- Jan 31: Canada GDP Growth Rate for Q4 2023
- Feb 1: Bank of Canada Policy Meeting
- Feb 5: Bank of Canada Business Outlook Survey
- Feb 6: Canada Ivey PMI for January
- Feb 7: Canada Foreign Trade for December
- Feb 9: Canada Jobs Report for January
Stabilising Outlook for Euro Area Economy and EUR/USD in 2024
The Euro Area economy is projected to see sluggish but stabilising growth in 2024, with GDP expanding by 0.5-1% as headwinds from high inflation, monetary tightening, and the energy crisis fade. Core inflation will likely moderate towards the ECB's 2% target during the year as demand slows and supply constraints ease. This could allow the ECB to pause its tightening cycle, holding rates steady through late 2024. However, risks remain from potential fiscal tensions in Italy and lingering impacts of the Russia-Ukraine conflict. The stabilising growth and inflation outlook has the potential to provide some support for the EUR/USD currency pair following its decline in 2023, with forecasts suggesting it could trade around 1.04 by end-2024.
Economic Indicators: The Euro Area economy contracted by 0.1% in Q3 2023, marking its first GDP decline since Q4 2022. Growth is expected to pick up to 0.3-0.5% in Q4 2023 and 2024 as headwinds diminish. Inflation eased to 2.9% in December 2023 from a peak of 10.6% in October 2022. Core inflation also moderated to 3.4%, its lowest since March 2022. The jobless rate hit a historic low of 6.4% in November 2023. Retail sales declined by 0.3% month-over-month in November 2023.
Monetary Policy: The ECB left interest rates unchanged at 4.5% in January 2024 after concluding its rapid hiking cycle in September 2023. Rates are expected to be held at restrictive levels through late 2024 to ensure inflation returns to the 2% target. Risks remain tilted to the downside for growth, limiting scope for rate cuts.
Geopolitical Landscape: Key issues impacting the Euro Area economy include the Russia-Ukraine conflict, migrant crisis with Tunisia, and Italian fiscal uncertainties. Progress was made on admitting Bulgaria and Romania into the Schengen area.
Technical Analysis: The EUR/USD currency pair weakened to 1.08 in January 2024 amid dollar strength, having traded around 1.09 at end-2022. Forecasts suggest the pair could rise towards 1.04 by end-2024 on stabilising Euro Area growth prospects.
Upcoming Economic Events:
- Jan 30: Euro Area Q4 2023 GDP Growth Rate
- Feb 1: Euro Area January 2024 Inflation Rate
- Feb 6: Euro Area December 2023 Retail Sales
United Kingdom: Navigating Persistent Headwinds
The UK economy faces significant headwinds in 2024 including high inflation, a deteriorating economic landscape, and geopolitical uncertainties. However, tight labour markets and resilient consumer spending provide some tailwinds. The Bank of England is expected to maintain its restrictive monetary policy stance for an extended period to curb inflation. Meanwhile, the GBP/USD currency pair is range bound between 1.2750 and 1.2700 as traders eye the BoE's upcoming policy meeting.
Economic Indicators: Latest data shows the UK economy contracted 0.1% in Q3 2023 while inflation rose to 4% in December, overshooting forecasts. The BoE voted 6-3 to keep interest rates unchanged at 5.25% in December and emphasised the need for sustained tightening. However, markets are pricing in rate cuts starting in H2 2024. Retail sales declined sharply in December and the unemployment rate held steady at 4.2% in November.
Monetary Policy: The BoE has hiked rates to a 15-year high of 5.25% to combat high inflation. Policymakers highlight the potential need for further tightening if inflation persists. However, with inflation projected to fall and wage growth decelerating, markets expect rate cuts to begin in H2 2024.
Geopolitical Landscape: Key events impacting economic performance and GBP sentiment include stalled UK-Canada trade negotiations, joint US-UK strikes on Yemen's Houthis, and the Russia-Ukraine conflict driving UK's terms of trade shock. Meanwhile, the UK and Ukraine signed a bilateral security pact.
Technical Analysis: The GBP/USD is trading in a range between 1.2750 and 1.2700, finding support above 1.27 amid a stalled US dollar recovery. The pair is expected to trade at 1.25 by the end of Q1 2024 and 1.20 in 12 months according to forecasts.
Upcoming Economic Events:
- Jan 30: BoE Consumer Credit, Mortgage Approvals, Mortgage Lending
- Jan 31: Nationwide House Prices
- Feb 1: Manufacturing PMI, BoE Rate Decision, Monetary Policy Report
- Feb 5: Services PMI
- Feb 6: BRC Retail Sales, Construction PMI
- Feb 7: Halifax House Prices
Switzerland: Cautiously Optimistic Economic Outlook
The Swiss economy is expected to see moderate GDP growth of 0.7-1.0% in 2023 and 0.5-1.0% in 2024, with inflation slowing to around 1.9% in 2024. The Swiss National Bank is likely to keep interest rates unchanged at 1.75% in the near term to support growth, while monitoring inflation closely. Key risks include global economic weakness and the strong Swiss franc. For the USD/CHF, range bound trading between 0.85-0.90 is expected in the next 6-12 months based on fundamentals and technicals. Upside risks could come from safe haven CHF flows amidst global uncertainty.
Economic Indicators: Switzerland's GDP grew 0.3% in Q3 2023, driven by services and exports. Inflation slowed to 1.7% in December 2023. The SNB forecasts 2023 GDP growth around 1.0%, 2024 growth between 0.5-1.0%, 2023 inflation at 2.1%, and 2024 inflation at 1.9% . The unemployment rate ticked up to 2.3% in December 2023. These indicators point to an economy expanding at a modest pace with slowing inflation. Key risks include global economic weakness and currency appreciation impacting Swiss exports.
Monetary Policy: The SNB left rates unchanged at 1.75% in December 2023 and noted slightly easing inflationary pressures. However, policymakers signalled readiness to adjust policy if needed to ensure price stability. With inflation expected to remain above the 0-2% target range in 2023, the SNB will likely keep rates on hold through 2024 to support growth. An easing cycle could start in 2025 if inflation slows further.
Geopolitical Landscape: Right-wing gains in October 2023 elections may fuel anti-immigration policies. However, the governing coalition is expected to remain stable. Switzerland maintains neutrality amidst the Russia-Ukraine conflict, but its financial sector has implemented Western sanctions on Russia, carrying economic risks.
Technical Analysis: The USD/CHF is trading around 0.86, below the 2022 high of 0.92. With the pair stuck in a range between 0.85 support and 0.90 resistance since mid-2022, more range bound trading is likely. However, global risk aversion could boost safe haven CHF flows, pushing the pair back towards 0.85 support over the next 6-12 months.
Upcoming Economic Events:
- Jan 30: Switzerland Balance of Trade Dec
- Jan 31: Switzerland Retail Sales YoY Dec
- Feb 1: Switzerland Manufacturing PMI Jan
- Feb 2: Switzerland Consumer Confidence Q1
- Feb 7: Switzerland Unemployment Rate Jan
Japan: On the Path to Economic Revival
The Japanese economy is showing signs of a revival after decades of stagnation, supported by a shift from deflationary to inflationary conditions. Core inflation hit a 41-year high in December while the unemployment rate remains near three-decade lows. The Bank of Japan reaffirmed confidence in achieving its 2% inflation target on a sustained basis. These positive developments, combined with structural reforms, are laying the foundations for a period of stable growth.
However, downside risks remain in the form of global slowdown and supply-side constraints. The USD/JPY currency pair will likely trade in a range bound manner over the near-term. Further yen depreciation seems limited amid rising speculation over a hawkish pivot by the BoJ.
Economic Indicators: Japan's economy contracted 0.7% quarter-over-quarter in Q3 2023, reflecting elevated cost pressures and weakening overseas demand. However, pent-up domestic demand from reopening momentum should support a pickup in growth ahead. GDP is projected to expand 0.4% in Q4 and average around 0.5% in 2024-2025.
Inflation hit a 41-year high of 4% in December before moderating to 2.6% . While goods inflation is cooling from supply improvements, services costs remain sticky. Core-core inflation expectations for 2024-2025 remain near 2%, signalling entrenched pressures.
The job market stays resilient with unemployment at 2.5% in November 2023, near the lowest since 1992. The jobs-to-applicants ratio was last recorded at 1.28, pointing to labour shortages.
Monetary Policy: The Bank of Japan left its ultra-loose monetary policy unchanged at its January 2023 meeting while noting that confidence is growing towards achieving its 2% inflation target on a sustained basis. This contrasts with market speculation over a hawkish pivot. The BoJ is likely to normalise policy gradually to support growth while preventing market disruptions.
Geopolitical Landscape: Domestically, Prime Minister Kishida aims to boost defence spending while promoting structural reforms to support economic revival. However, he faces political challenges to retain LDP leadership and stability until the 2025 upper house elections.
Regionally, Japan is deepening strategic ties with the US and allies to counter Chinese assertiveness and North Korean provocations. Strained relations with South Korea have improved slightly but historical disputes remain unresolved.
Technical Analysis: The USDJPY pair has traded range bound so far in 2024, between 144 and 148. The base at 144 aligns with the 200-day moving average and the 38.2% Fibonacci retracement level from the 2022 downtrend. Below 144, the next support lies at 142. Upside seems limited given hawkish Fed expectations are priced-in while the BoJ maintains loose policy. Resistance is seen at the recent high of 148 and the psychological 150 level.
Upcoming Economic Events:
- Jan 31: Industrial Production, Retail Sales
- Feb 1: Manufacturing PMI
- Feb 5: Services PMI
- Feb 7: Current Account Balance
Australia: Resilient Growth Despite Global Headwinds
The Australian economy is expected to see resilient but slowing growth in 2023-2024, with GDP forecast to expand around 1.8-2.1% annually over the next two years. Inflation remains high at over 5%, though it has fallen from peak levels, and is projected to gradually moderate over 2024. The RBA has raised interest rates aggressively to 4.35% to combat inflationary pressures. Tighter monetary policy, combined with declines in real incomes, will weigh on domestic demand. However, solid export growth, infrastructure investment, and a still-strong labour market will support the economy. The AUD/USD currency pair will likely trade in a 0.63-0.67 range in the near term, reflecting relative growth and policy divergence between Australia and the U.S. Key downside geopolitical risks stem from a potential sharp China slowdown.
Economic Indicators: The RBA has raised interest rates 450 basis points since early 2022 to 4.35% in an effort to tame inflation, which reached a three-decade high of 7.8% in Q2 2022 before moderating to 5.4% in Q3 2023. The central bank expects to keep rates elevated for an extended period to return inflation to the 2-3% target range by 2025. GDP growth eased to 2.1% y/y in Q3 2023 from 3.7% in 2022, as consumer spending stalled on declining real incomes. However, infrastructure investment and export growth supported the economy. The unemployment rate ticked up to 3.9% in December but remains near 48-year lows.
Monetary Policy: The RBA has aggressively tightened monetary policy, lifting the cash rate 450 basis points since early 2022 to a nine-year high of 4.35%. The central bank has signalled rates will remain elevated for some time to lower inflationary pressures. Markets expect one more 25 bp hike in Q1 2024, followed by potential rate cuts beginning in Q4 2024.
Geopolitical Landscape: Key external risks include a potential sharp China economic slowdown, which would significantly impact Australian export demand. Meanwhile, the new AUKUS security partnership between Australia, the U.S. and U.K. aims to counter rising Chinese influence in the Indo-Pacific region. Domestically, the Labor government elected in 2022 has pursued an expansionary fiscal policy focused on infrastructure, health care, education and renewable energy investment.
Technical Analysis: The AUD/USD currency pair has traded in a range between 0.63-0.68 over the past six months. With the U.S. Fed seen sticking to a more hawkish policy stance than the RBA this year, AUD/USD may retest support around 0.63 in Q1 2024 before stabilising. However, if Chinese growth rebounds faster than expected, the pair could rally back towards resistance around 0.67. Trading Economics forecasts AUD/USD at 0.66 by end-2024.
Upcoming Economic Events:
- RBA Interest Rate Decision (Feb 6): Volatility expected to be high
- Q4 GDP Growth Rate (Feb 6): Estimate 0.2% q/q
- February Employment Report (Mar 9): Unemployment rate estimate 4.1%
New Zealand: Navigating Global Headwinds
New Zealand's economy is slowing as intended by the RBNZ to curb inflation. GDP contracted in Q3 2023 and inflation eased to 4.7% in Q4, allowing the central bank to pause its tightening cycle. However, risks remain from persistent capacity pressures and high core inflation. The RBNZ may hike the OCR to 5.7% if excess demand continues. Meanwhile, the NZD steadied around 0.61 as CPI data met expectations. Equity markets rose on hopes of a potential rate cut in 2024.
Economic Indicators: Over the last year, New Zealand's economy recovered swiftly from the pandemic before overheating. GDP grew 5.1% in 2021. However, growth is decelerating as intended by the RBNZ, with the economy contracting 0.3% in Q3 2023. Inflation surged to 5.6% in Q3 2023 before easing to 4.7% in Q4, yet remains above the 1-3% target range. The unemployment rate ticked up to 3.9% in Q3 2023. High inflation and rising rates are weighing on private consumption and business investment.
The tempering of growth and inflation allows room for the RBNZ to pause its tightening campaign, keeping rates steady at 5.5% in November. However, policymakers noted ongoing excess demand and capacity pressures remain a concern. The cash rate may still peak at 5.7% if pressures persist. Market pricing indicates potential rate cuts in 2024.
Monetary Policy: The RBNZ has hiked rates aggressively from 0.25% in October 2021 to 5.5% in November 2023 to curb rampant inflation. With inflation showing early signs of easing, the central bank left rates unchanged for a fourth straight meeting in November, signalling the tightening cycle may be nearing an end. However, policymakers emphasised interest rates need to remain restrictive for some time to ensure inflation returns sustainably to target.
Geopolitical Landscape: Prime Minister Ardern's resignation introduces political uncertainty domestically. Her successor will need to balance growth against high inflation.
Global tensions around Taiwan and Ukraine fuel market volatility. As a small open economy, New Zealand remains exposed to external shocks.
Ongoing trade issues with China, New Zealand's largest trading partner, present a key downside risk. Any potential flare up could significantly impact export revenue.
Technical Analysis: The NZD/USD trades around 0.61, holding above the 200-day SMA which indicates overall bullish momentum. However, the currency pair faces resistance around 0.62. Trading Economics estimates the kiwi will edge up to 0.62 by end of Q1 2024 before falling to 0.59 in the next 12 months as rate cut bets gather pace.
The CHF/JPY rebounded from June lows as the safe haven franc strengthened. However, the cross currency remains largely range bound between 143-146 in recent months as traders weigh global recession risks against prospects for a Fed pivot.
Upcoming Economic Events:
ANZ Business Confidence (31 Jan)
Employment Change (6 Feb)
Unemployment Rate (6 Feb)
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-