DERBYSHIRE UK, Jan 25, 2024, Week 4. Welcome to Wednesday. Keep a close eye on a series of upcoming central bank decisions, including those from the ECB, BoC, Fed, and BoE, as these will likely influence the EUR, CAD, USD, and GBP respectively. The US economic health indicators, notably the upcoming GDP Growth Rate and Core PCE Price Index, are also crucial and could significantly sway the USD. In the currency snapshot, the US Dollar Index (DXY) remains elevated, reflecting strong US economic data and diminishing expectations for a March rate cut. USD/CAD is responding to mixed economic signals, while the EUR/USD is trading cautiously ahead of the ECB policy decision. The GBP/USD shows resilience amidst domestic economic data, and USD/CHF sees the Swiss Franc modestly retreat. The USD/JPY indicates a yen resurgence amid policy speculation. Finally, AUD/USD and NZD/USD are navigating through global dynamics and domestic rate speculations, offering a complex landscape for traders.
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Key Events
January 23, 2024, US API Crude Oil Stock Change: A significant change in crude oil stocks can influence energy currency pairs like USD/CAD and NOK/USD. Lower-than-expected stocks typically bolster oil prices, strengthening currencies of oil-exporting countries.
January 24, 2024, BoC Interest Rate Decision: The Bank of Canada's decision could affect the CAD. A rate hike might strengthen the CAD, while a hold or cut could weaken it, impacting pairs like USD/CAD and EUR/CAD.
January 24-25, 2024, US S&P Global PMIs & GDP Growth Rate QoQ: These indicators provide insight into economic health. Strong figures could boost the USD, impacting major pairs like EUR/USD and USD/JPY.
January 25, 2024, ECB Interest Rate Decision: The Euro could be influenced by the ECB's decision. A rate hike could strengthen the EUR, affecting EUR/USD and EUR/GBP pairs.
January 26, 2024, US Core PCE Price Index: As the Fed's preferred inflation measure, this data could sway USD pairs. Higher inflation may strengthen the USD on expectations of continued Fed hawkishness.
January 30, 2024, Euro-Area GDP Growth Rate QoQ Flash: This data impacts the EUR. A better-than-expected growth rate might strengthen the EUR, affecting pairs like EUR/USD and EUR/JPY.
January 31, 2024, US Fed Interest Rate Decision: A critical event for all USD pairs. A rate hike could strengthen the USD, while dovish signals might weaken it, impacting global forex markets.
February 1, 2024, BoE Interest Rate Decision: The GBP could react significantly. A rate hike might boost the GBP, impacting GBP/USD and EUR/GBP, while a hold or cut could have the opposite effect.
February 2, 2024, US Non-Farm Payrolls & Unemployment Rate: These are key indicators of economic health. Strong job growth and low unemployment could strengthen the USD, impacting USD pairs.
Currency Snapshot
US Dollar Index (DXY): Elevated Amid Hawkish Federal Reserve Signals: The US Dollar Index (DXY) has recently shown a strengthening trend, reaching above 103.7, its highest in six weeks. This surge can be attributed to unexpectedly strong US economic data and hawkish signals from Federal Reserve officials, tempering expectations for a March rate cut. Notable inputs include comments from San Francisco Fed President Mary Daly, emphasising the economy's robust position, and positive data on retail sales and consumer sentiment. The market now sees only a 40% chance of a Fed rate cut in March, significantly lower than previously anticipated. Trading Economics forecasts the DXY to trade around 103.16 by the end of this quarter, with an estimated rise to 106.38 in 12 months.
USD/CAD: Responding to Mixed Economic Signals: The USD/CAD pair has been navigating mixed economic landscapes, trading around 1.345 per USD. The Canadian dollar's recent recovery from a one-month low reflects changing market perceptions of the Bank of Canada's interest rate path. Surveyed economists suggest potential delays in rate cuts, with most not expecting changes until at least June. However, higher-than-expected headline inflation in December and accelerated core gauges have limited the loonie’s recovery. This, coupled with disappointing retail sales data, fuels expectations of more accommodative borrowing conditions in Canada. Trading Economics projects the USD/CAD to trade at 1.34 by the end of this quarter and anticipates an increase to 1.38 in the next 12 months.
EUR/USD: Cautious Stance Amid ECB Policy Decisions: The EUR/USD pair has been trading around the $1.09 mark, close to its lowest level since mid-December, reflecting a cautious market sentiment. Investors are closely monitoring the release of flash PMI data and the European Central Bank's upcoming interest rate decision. While the ECB is expected to maintain its current policy stance, President Christine Lagarde's comments will be key in signalling the potential timing of future rate reductions. Hawkish remarks from ECB officials last week have tempered early rate cut expectations, with the market now pricing in approximately 130 basis points of cuts for the year. The ECB's minutes from its December meeting highlighted confidence in returning inflation to target, yet underscored the necessity of maintaining a restrictive stance. Trading Economics forecasts the EUR/USD to trade around 1.08 by the end of this quarter, with an anticipated decline to 1.04 in 12 months.
GBP/USD: Resilient Amidst Domestic Economic Data: The GBP/USD pair is holding steady at $1.27, recently reaching a four-month high against the euro. This resilience stems from expectations that the Bank of England (BoE) may implement rate cuts later than its Euro Area and US counterparts. Recent UK economic data, including a smaller-than-expected budget deficit for December, have provided some support for the pound. However, last week's reports indicating a sharp decline in retail sales and an unexpected inflation increase have heightened recession risks. Market predictions suggest a 50% chance of a BoE rate cut in May, though this may be premature given the central bank's inflation concerns. Trading Economics projects the GBP/USD to trade at 1.25 by the end of this quarter, with a further decrease to 1.20 expected in 12 months.
USD/CHF: Swiss Franc's Modest Retreat Amid Dollar Strength: The USD/CHF currency pair has seen the Swiss Franc depreciating towards 0.87 per USD, reaching a one-month low. This movement is influenced by a rebound in the US dollar, as expectations for immediate rate cuts by the Federal Reserve have eased. Concurrently, markets anticipate a hawkish stance from the Swiss National Bank (SNB) in the coming months. Despite Swiss inflation remaining within the SNB's target, the Franc's support has strengthened, aiding a lower inflation outlook. The SNB's President, Thomas Jordan, noted the impact of this strength on the inflation outlook. Trading Economics forecasts the USD/CHF to be around 0.86 by the end of the quarter, with a potential rise to 0.89 in the next 12 months.
USD/JPY: Yen's Resurgence Amid Policy Speculation: The Japanese Yen has appreciated, crossing 148 per USD, rebounding from recent lows as speculations about a shift in Japan’s monetary policy gain traction. This shift is in response to Bank of Japan Governor Kazuo Ueda’s comments about the increasing likelihood of achieving the 2% inflation target and the potential end of negative interest rates in April 2024. The Bank of Japan maintained its ultra-loose monetary policy at its recent meeting, aligning with market expectations, amidst easing inflationary pressures. The headline inflation rate in Japan has declined, prompting the central bank to retain the 1% cap on the 10-year Japanese government bond yield. Trading Economics projects the USD/JPY to trade around 144.36 by the end of the quarter, with an anticipated increase to 151.49 in 12 months, reflecting these domestic and international economic factors and central bank policies.
AUD/USD: Resilient Amid Global and Domestic Dynamics: The Australian dollar (AUD/USD) has shown resilience, climbing above the $0.66 mark, buoyed by global and domestic economic factors. This recovery from recent lows is partly attributed to a rally in the Chinese yuan, as China’s cabinet pledged significant measures to stabilise its stock market, positively influencing investor sentiment. Domestically, the Australian dollar has been bolstered by market expectations that the Reserve Bank of Australia (RBA) will delay shifting to an easing mode compared to other major central banks. The current forecast suggests that the RBA might not initiate rate cuts until November 2023, with only a total of 33 basis points reduction anticipated for the year. This cautious approach by the RBA, in the face of global economic uncertainties and China’s economic stimulus, presents a complex backdrop for the AUD/USD pair. Trading Economics expects the AUD/USD to hover around 0.67 by the end of this quarter, potentially declining to 0.63 in the following 12 months.
NZD/USD: Navigating Through Rate Speculations and Global Sentiments: The New Zealand dollar (NZD/USD) has experienced a modest rebound, crossing the $0.61 threshold. This slight recovery from near two-month lows is influenced by the global market response to China’s proactive measures to stabilise its stock market. The NZD remains under pressure domestically, with growing expectations that local interest rates have likely reached their peak. Markets are pricing in approximately 100 basis points of easing for the year, reflecting the shifting monetary policy landscape. Investors are keenly awaiting New Zealand's fourth-quarter inflation data, expected to show signs of easing price pressures. The Reserve Bank of New Zealand (RBNZ) Chief Economist’s upcoming speech is anticipated to address these dovish market bets, potentially impacting the NZD/USD trajectory. Trading Economics forecasts the NZD/USD to be around 0.62 by the end of the current quarter, with a projected decline to 0.59 in 12 months, as the currency navigates through domestic rate adjustments and global economic influences.
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
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