All Eyes on FOMC Minutes
Market Analysis for Week Number 08 2024
DERBYSHIRE UK, Feb 21, 2024, Week 8. Welcome to Wednesday. FOMC meeting minutes could impact currency movements. The US dollar index weakened last week but remains elevated, while the Canadian dollar faces headwinds from moderating crude prices.
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US Dollar - Steady Amid Cautious Optimism
The US dollar index weakened below 103.9 on Tuesday, hitting a two-week low. This mirrors the fall in Treasury yields as traders await further guidance from the FOMC on potential interest rate cuts. The dollar saw its biggest selling activity against the Euro and British pound.
Over the past 14 days, the dollar has declined due to lowering rate hike expectations and cautious optimism about inflation coming down. Traders are now assigning a 53% probability of a 25bps rate cut in June. Weaker retail sales and industrial production have also contributed to dollar weakness.
In the coming weeks and months, the dollar could continue to trade sideways or weaken slightly if inflation shows further signs of easing. This may lead the Fed to cut rates sooner than expected. However, the dollar could strengthen again if inflation remains sticky and the Fed maintains its hawkish stance. Key data to watch includes CPI, PCE, and employment reports. Geopolitical tensions may also impact currency movements.
CAD - Cautiously Stable Amid Cooling Inflation and Oil Price Resilience
The Canadian dollar weakened past 1.35 per USD over the past 14 days despite broad USD weakness, approaching a two-month low. This was driven by a sharp drop in Canada's inflation rate to 2.9% in January, well below expectations of 3.3% and down from 3.4% in December. The cooling inflation strengthened the case for rate cuts by the Bank of Canada (BoC) as policymakers noted high rates are already curbing demand. This contrasted with resilient crude prices amid heightened geopolitical tensions, limiting losses.
Going forward, the CAD could reverse some losses if the BoC signals openness to rate cuts at its March policy meeting to counter growth risks. However, gains may be capped by global recession worries that could limit oil demand gains. The CAD will likely trade rangebound near 1.35 per USD over the coming months if inflation continues moderating and oil prices hold up, absent shifts in BoC policy or geopolitics.
EUR - Cautious Optimism Amid Slowing Inflation and Wage Growth
The euro has strengthened over the past two weeks, rising above $1.08 to reach its highest level since early February. This appreciation has been driven by a weaker US dollar as well as data indicating a slowdown in Eurozone wage growth and inflation.
Negotiated wage growth in the euro area decelerated to 4.5% year-over-year in Q4 2023 from a record 4.7% in Q3. Slowing wage growth suggests that while underlying inflationary pressures remain elevated, they may have peaked. This could pave the way for ECB rate cuts later this year. However, ECB President Lagarde and other policymakers have struck a cautious tone, preferring to wait for Q1 wage data before considering cuts.
Going forward, the euro could extend gains if inflation continues moderating and the ECB signals a dovish pivot. However, there are risks from global growth concerns and geopolitics. Key events to watch include Eurozone PMIs and inflation data this week. The currency may consolidate around current levels in the near term before staging a more decisive breakout.
POUND STERLING - Supported by Cautious Optimism
The pound sterling has remained relatively steady over the past 14 days, hovering around the $1.26 level. This stability comes despite mixed economic data and dovish signals from the Bank of England. Retail sales rebounded strongly in January, pointing to resilient consumer spending. However, GDP contracted in Q4 2023, confirming the start of a recession. Meanwhile, BoE policymakers acknowledged that rate cuts may be warranted this year if the economy deteriorates. The slight sterling gains likely reflect cautious optimism that the recession may be shallower than expected amid signs of economic resilience.
Going forward, the pound will remain sensitive to UK data and central bank rhetoric. If the economy shows further signs of bottoming out, calls for BoE rate cuts may fade, offering modest upside potential back toward $1.30. However, a deeper downturn or more definite signals that cuts are imminent may spark a pullback toward $1.20. Overall, sterling seems set for rangebound, sideways trading barring significant shifts in the growth or policy outlook.
Swiss Franc Sentiment Stable on Low Inflation and Dovish SNB
The Swiss franc has remained stable over the past two weeks, hovering near 0.88 per USD. This follows a drop in Swiss headline inflation to 1.3% in January, a two-year low that was below the SNB's 2% target and fueled expectations of easing monetary policy. Bets increased that the SNB could cut interest rates as early as March to support weak growth forecasts. The franc was also weighed down by a rebound in SNB foreign exchange reserves in January after declining for two years, indicating less currency intervention.
Over the next few months, the franc is expected to hold around current levels versus the dollar. Upcoming Swiss economic data on GDP, inflation, unemployment and trade is likely to show low inflation and soft growth. This would reinforce bets on a dovish SNB stance and limited franc appreciation in the near term, with the USDCHF seen around 0.88 through the end of Q1. Contrasting situations and policy outlooks in Switzerland and the U.S. should keep the franc subdued.
JPY - Weakened by Recession and Dovish Policy
The Japanese yen has weakened over the past 14 days, depreciating 0.21% against the US dollar to 149.80. This is primarily due to Japan unexpectedly falling into a technical recession in Q4 2023, contracting 0.1% quarter-over-quarter. This has reduced expectations of a hawkish shift by the Bank of Japan (BOJ), with the central bank indicating it would not raise rates aggressively even if it abandons its negative rate policy. The recession and dovish BOJ stance have placed downside pressure on the yen.
Over the coming weeks and months, further yen depreciation seems likely. Analysts expect the currency to trade at 150.61 by end of Q1 2024 and 154.52 in 12 months as Japan's ultra-loose monetary policy diverges from tightening by the Federal Reserve. This policy divergence combined with Japan's weak economic outlook will maintain a weak yen trend absent intervention by authorities. However, verbal warnings by Japan's Finance Minister about sharp yen falls suggest intervention remains a possibility if depreciation accelerates.
AUSTRALIAN DOLLAR - Steady Amid Cautious Optimism
The Australian dollar has been relatively steady over the past 14 days, trading between $0.65 and $0.66. This follows the Reserve Bank of Australia's decision to keep interest rates unchanged at 4.35% at its February meeting, citing signs that inflation pressures are starting to ease. The RBA indicated it may cut rates later this year if inflation continues moderating towards its 2-3% target range.
Over the next few months, the AUD could edge lower if weakening global growth weighs on commodity prices. However, the currency should find support from Australia's strong fiscal position and robust labor market. The RBA also seems poised to cut rates to support growth if needed. Barring a sharp downturn in China or global recession, the currency looks set for a period of consolidation around current levels.
NZD - Currency Pressured by Economic Headwinds
The New Zealand dollar has declined over the past 14 days due to several economic factors. The economy contracted 0.3% in Q3 2023, falling short of expectations. Inflation remains high at 4.7%, though it has eased from 5.6% last quarter. The unemployment rate has also edged up to 4%. Additionally, the NZX 50 stock index has fallen nearly 2% year-to-date. These weak economic indicators have put pressure on the currency.
Over the next few months, the NZD may continue to face headwinds. GDP growth is expected to remain subdued around 0.4% as domestic and global demand slows. Inflation is projected to fall but remain above the central bank's 1-3% target range. Interest rates are likely to stay elevated to combat inflation. Meanwhile, rising geopolitical risks could spur safe-haven flows to the US dollar. However, if inflation falls more quickly than expected, the central bank could slow its tightening cycle, providing some relief for the currency."
Gavin Pearson
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Specialises in forex
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