Steady Growth and Falling Inflation Support Greenback
Market Analysis for Week Number 05 2024
DERBYSHIRE UK, Jan 30, 2024, Week 5. Welcome to Tuesday. Upcoming key events include the release of U.S. core PCE price index and nonfarm payrolls, which will provide insights into inflation and the labour market. The dollar index edged higher last month on steady U.S. economic performance and cautious Fed policy. The central bank kept interest rates unchanged in December and indicated future rate cuts in 2024 as inflationary pressures continue easing. Markets now expect the benchmark rate to fall toward 4.75% by end-2024.
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Steady Growth and Falling Inflation Support Greenback
The U.S. economy continues to show resilience, expanding at a faster than expected annualised rate of 3.3% in Q4 2023. Growth is forecast to slow to 2.6% in 2023 and 1.4% in 2024. Inflation has eased from peak levels but remains elevated. The Federal Reserve kept interest rates steady in December and indicated 75 bps of cuts in 2024. The dollar index edged higher on steady U.S. economic performance and cautious Fed policy.
Economic Indicators:The U.S. economy grew at an annualised rate of 3.3% in Q4 2023, beating forecasts of 2.0% growth. The expansion was driven by strong consumer spending, business investment, and export growth. Inflation eased to 3.4% in December from a peak of 9.1% in June 2022 but remains above the Fed's 2% target. The unemployment rate held steady at 3.7% in December, indicating continued labour market resilience. However, job gains moderated to 216,000 in December from an average monthly gain of 539,000 in 2021.
Overall, steady GDP growth, falling inflation, and a tight labour market support the relative strength of the U.S. economy and the dollar heading into 2024. However, downside risks remain from high inflation, rising interest rates, and slowing global growth.
Monetary Policy: The Fed kept interest rates unchanged in a range of 5.25%-5.50% in December. Policymakers indicated future 75bps of cuts in 2024 as inflationary pressures continue easing. Markets expect the benchmark rate to end 2024 around 4.75% and fall further to 3.75% in 2025. The cautious rate outlook has offered support to the U.S. dollar.
Geopolitical Landscape: Geopolitical tensions remain elevated, with conflict intensifying between U.S. allies and Russian/Iranian-backed forces in Ukraine and the Middle East. However, the direct economic impact has been limited thus far. The Biden administration also faces domestic scrutiny from a divided Congress. Overall, geopolitics has not significantly altered the currency's trajectory.
Technical Analysis: The dollar index (DXY) trades around 103.5, holding near a one-month high. It found support around 102 and faces resistance around 104. The technical outlook remains constructive for the greenback as long as prices hold above the 102 support level.
Upcoming Economic Events
- U.S. Core PCE Price Index (January 31): Estimated high volatility
- U.S. Nonfarm Payrolls (February 3): Estimated high volatility
- U.S. Consumer Price Index (February 14): Estimated high volatility
Canada: Cautious Optimism on Growth and Inflation Outlook
The Canadian economy is projected to slow from 3.4% GDP growth in 2022 to 1.2% in 2024 as tighter monetary policy dampens economic activity. Inflation has declined from a peak of 8.1% but remains stubbornly high at 3.4% in December 2023, with risks of persistence warranting sustained restrictive interest rates. The BoC is expected to hold its policy rate at 5% through 2023 before easing to a terminal rate of 3% by 2025. Meanwhile, oil prices are seen averaging US$74.81 per barrel in 2024, supporting the commodity-linked Canadian dollar. Overall, the loonie is expected to gradually appreciate from US$1.34 currently to US$1.38 by end-2024.
Economic Indicators: Latest GDP data shows a 0.3% contraction in Q3 2023, indicating the BoC's restrictive policy is slowing growth more than expected. The bank projects GDP growth of 1.8% in 2023 and 1.2% in 2024. Inflation rose to 3.4% in December 2023 on rebounding gas prices, with core inflation gauges unexpectedly increasing as well. The BoC sees inflation holding around 3% in H1 2024 before returning to 2% target in 2025. The job market has begun cooling with unemployment steady at 5.8% in December 2023. However, labour shortages persist with over 1 million vacancies in November.
Monetary Policy: The BoC left rates unchanged at 5% in January 2024, concerned about stubborn core inflation. However, it noted high rates have significantly slowed growth via reduced consumer and business spending. Markets believe peak rates have been reached, expecting cuts to begin in H2 2024 once excess demand recedes.
Geopolitical Landscape: Escalating Middle East conflicts involving drone attacks and threats to oil shipments may disrupt supply and boost crude prices. Meanwhile, the UK and Canada paused FTA talks after 8 unsuccessful rounds, adding trade uncertainty.
Technical Analysis: USD/CAD reversed from the 1.3897 peak, establishing a short-term downtrend. Price bounced from the 1.3176 support and needs to break 1.3540 to confirm bullish momentum towards 1.3617. RSI shows USD/CAD as oversold, supporting further gains.
Upcoming Economic Events:
- Jan 31: Canada GDP Monthly
- Feb 1: Canada Manufacturing PMI
- Feb 6: Canada Ivey PMI, BoC Gov Speech
- Feb 7: Canada Trade Balance
- Feb 9: Canada Unemployment Figures
Stabilising Outlook for the Euro-Area
The Euro-Area economy is showing early signs of stabilisation after a year of slowing growth, high inflation, and aggressive monetary tightening. GDP is projected to grow a modest 0.3% in 2024 following a mild recession in late 2023. Inflation has likely peaked and is forecast to gradually fall toward the 2% target over 2023, aided by easing supply pressures and the lagged impact of ECB rate hikes. However, risks remain tilted to the downside from potential wage-price spiral, global growth headwinds, and lingering geopolitical tensions that could spark renewed volatility in EUR/USD. The ECB is poised to cut rates in H2 2024 to support recovery.
Economic Indicators: The Eurozone contracted 0.1% in Q3 2023, entering a technical recession after two straight quarters of falling output. High inflation and rising interest rates have squeezed household budgets and dampened demand. More positively, the labour market remains resilient with unemployment at historic lows. Latest data shows inflation ticking up to 2.9% in December 2023 but still well below mid-2022 peak levels. Core inflation remains sticky at 3.4%, underscoring persistent underlying price pressures.
Leading indicators like retail sales and surveys point to further near-term weakness. However, easing inflationary headwinds coupled with recovering global demand and a potential ECB rate cut by mid-2024 could spark a modest rebound. Risks remain skewed to the downside from potential wage-price spiral and global spillovers.
Monetary Policy: The ECB has held rates steady at 4.5% in early 2024, sticking to its tightening bias for now to rein in lingering inflationary pressures. However, several policymakers have hinted cuts could come as soon as H2 2024 if energy-driven inflation continues to moderate and growth slows further. Markets are pricing in rate cuts toward 2.5% by end-2024. While remaining vigilant on inflation, the ECB may pivot toward supporting growth if conditions align.
Geopolitical Landscape: Key risks stem from potential escalations in the Russia-Ukraine war, migrant crisis with Africa, and economic tensions between EU and major trade partners. These could spark renewed volatility in EUR/USD. However, incremental progress has been made in some areas like Hungary dropping veto on EU defence fund for Ukraine and agreement with Tunisia to curb irregular migration.
Technical Analysis: EUR/USD has trended down from its mid-2022 peak, recently breaking below 1.08 support to its lowest level since December 2022. Bearish sentiment prevails on growth and monetary policy divergence between EU and U.S. The pair may test 1.04 in coming months. However, it could reverse higher if ECB rate cut views accelerate.
Upcoming Economic Events
- Jan 30: Eurozone Q4 2023 GDP
- Feb 1: Eurozone January Inflation Data
- Feb 6: Eurozone December Retail Sales
- Feb 10: Eurozone Q4 2023 GDP (Second Estimate)
United Kingdom: Cautious Optimism Amid Gradual Recovery
The UK economy is projected to see sluggish but positive growth in 2024, supported by easing inflationary pressures, a modest rebound in real incomes, and resilient labour market conditions. However, high interest rates, geopolitical tensions, and lingering structural drags temper the outlook. GBP/USD is likely to trade range bound in the near term before a gradual appreciation later in 2024 as rate cuts materialise.
Economic Indicators:
- GDP growth expected at 0.5% in 2024 and 1.0% in 2025 after near stagnation in 2023. Inflation is set to moderate from 6.7% to 2.7% by end-2024.
- Retail sales and trade activity remain weak but should stabilise over 2024. Unemployment rate is likely to edge up to 4.6% but the labour market is still tight overall.
Monetary Policy:
- BoE benchmark rate currently at 15-year high of 5.25% but expected to be cut to 4.50% by end-2024 as inflationary pressures fade. Policy to remain restrictive through H1-2024 before gradual easing.
Geopolitical Landscape:
- Persistent global tensions around energy prices, Middle East conflict, and UK-EU relations pose downside risks. Rishi Sunak government faces a crucial migration legislation vote.
Technical Analysis:
- GBP/USD consolidating around the 1.27 level after rebounding from the 1.2036 low. Nearest support at 1.2499 and resistance at 1.2826. Overall range bound sentiment in near term before possible climb toward 1.3141.
Upcoming Economic Events:
- Jan 30: BoE Consumer Credit, Mortgage Approvals
- Jan 31: Nationwide House Prices
- Feb 1: BoE Interest Rate Decision
- Feb 5: Services PMI
- Feb 6: BRC Retail Sales
Switzerland: Cautious Optimism Amid Global Headwinds
The Swiss economy is expected to grow moderately in 2023 and 2024 between 0.5-1.0%, supported by resilient domestic demand despite weakening global growth. Inflation has moderated but remains elevated around 2% over the medium-term. The SNB is likely to remain cautious, holding rates at 1.75% through mid-2024 before potential cuts to support growth. Key risks include global recession, currency appreciation, and external shocks. The franc will remain supported as a safe haven, limiting significant USD/CHF upside near-term.
Economic Indicators: The Swiss economy rebounded 0.3% in Q3 2023 after a 0.1% fall in Q2, driven by domestic demand. Full year growth is expected around 1% in 2023. The SNB forecasts 2024 growth between 0.5-1.0% on softer global demand. Inflation slowed to 1.4% in November 2023, the lowest since October 2021, but will likely rise moderately given higher electricity, rents, and VAT. The central bank sees inflation averaging 2.1% in 2023, 1.9% in 2024, and 1.6% in 2025. The jobless rate ticked up to 2.3% in December, remaining near historic lows.
Monetary Policy: The SNB has kept rates unchanged at 1.75% in recent meetings, noting inflationary pressure has eased slightly but uncertainty remains high. Policymakers stand ready to tighten policy if needed to keep inflation within target levels. Markets expect rates to remain on hold through mid-2024 before potential cuts to support growth.
Geopolitical Landscape: While direct exposure is limited, Switzerland remains susceptible to external shocks from the Russia-Ukraine conflict, Middle East tensions, and global growth slowdown. These could dampen export demand, disrupt supply chains, hit investor sentiment, and spur safe haven flows into the franc.
Technical Analysis: The USD/CHF has retreated towards 0.86 in recent weeks as the franc strengthens amidst global uncertainty. The pair is expected to trade around 0.86 in the near-term with the franc supported by its safe haven status. Upside appears limited given SNB concerns over currency strength. Trading Economics forecasts the pair at 0.89 in 12 months.
Upcoming Economic Events
- Jan 30: Trade Balance
- Jan 31: Retail Sales
- Feb 1: Manufacturing PMI
- Feb 2: Consumer Confidence
- Feb 7: Unemployment
Australia: Cautiously Optimistic Economic Outlook
The Australian economy is projected to see GDP growth around 1-2% in 2023-2024, slowing from the robust post-pandemic rebound. Inflation remains high at 5-6% but is gradually moderating, while the RBA has paused rate hikes after aggressive tightening. The job market is still tight with low unemployment, supporting incomes. Strong trade surpluses boosted by commodity exports also provide a buffer. However, high household debt and rising rates present headwinds. Overall the outlook is cautiously optimistic, with the RBA striking a delicate balance between supporting growth while tackling inflation. This could keep AUD/USD range bound around 0.65-0.68 in the near term.
Economic Indicators: The latest GDP data shows the economy expanded a modest 0.2% in Q3 2023, slowing from 0.4% last quarter, on weaker household consumption and negative trade impact[1]. But growth is still positive and is forecast around 1-2% in 2023-2024 before picking back up to 2.5% by 2025[2]. Inflation dropped from a peak of 6% to 5.4% in Q3, but remains outside the RBA's 2-3% target range[1]. The RBA expects it to average 5.8% in 2023 and 4% in 2024 before falling to 2.3% by 2025[3]. The job market remains tight with unemployment steady at 3.9% in December[1], still near 48-year lows. This supports incomes but also wage and inflation pressures. The trade surplus hit a record $19.4 billion in June 2022[4] but narrowed recently as exports fell while imports grew[1]. Still, strong commodity exports provide a buffer.
Monetary Policy: After a period of aggressive tightening, the RBA has kept rates steady at 4.35% since December[1] to assess the impact of prior hikes. But policymakers maintain rates may still need to rise further if high inflation persists amid strong demand and rising services costs[1]. The RBA aims to strike a delicate balance between taming inflation while trying not to stall growth. Markets expect rates to remain on hold through much of 2023 before potential cuts in late 2023 or 2024[1].
Geopolitical Landscape: No major domestic geopolitical events are significantly impacting the economic outlook currently. Externally, growth risks stem from global recession worries, China's economic slowdown, and the Russia-Ukraine conflict's commodity supply impact[3]. But resilient domestic demand so far is providing a buffer.
Technical Analysis: After hitting multi-year highs above 0.76 in early 2022, AUD/USD declined over 20% to below 0.60 recently on broad USD strength and global growth worries before stabilising around 0.65 currently[5]. In the near term, 0.63-0.64 provides support while resistance is around 0.67-0.68[6]. Trading Economics forecasts AUD/USD at 0.67 by end-2023 and 0.63 in 12 months[5], implying range bound trading.
Upcoming Economic Events:
- Jan 31: Inflation Rate Q4
- Feb 1: Building Permits Dec
- Feb 2: Home Loans, Investment Lending Dec
- Feb 5: Balance of Trade Dec, RBA Rate Decision
- Feb 6: RBA Press Conference
- Feb 8: RBA Speech
New Zealand: Navigating Global Headwinds
New Zealand's economy is slowing from its strong post-pandemic rebound, with GDP growth expected around 2-3% in 2023-24 amid high inflation and rising interest rates weighing on consumption. The RBNZ has hiked rates aggressively to 5.50% to combat inflation and may need to tighten further if high core inflation persists. Slowing global growth, especially in key trading partners like China, presents risks. For the CHF/JPY currency pair, the flight to safe-haven CHF during global uncertainty is supportive, while Japan's ultra-loose monetary policy weighs on JPY. Technical analysis suggests the pair may rise toward 172 resistance.
Economic Indicators: New Zealand's economy contracted 0.3% in Q3 2023, with weakness in consumption, investment, and exports. Inflation eased to 4.7% in Q4 but remains well above the 1-3% target range. The unemployment rate rose to 3.9% in Q3, the highest since mid-2021. GDP growth is forecast at 0.1% in Q4 2023 and around 2-3% in 2024. Inflation is projected to hover near 5% this quarter before declining toward the 2% midpoint of the RBNZ's target range in 2025.
The slowing economy and easing inflation pressures suggest monetary policy may be approaching an inflection point. However, the RBNZ projects the cash rate peaking at 5.7% to ensure inflation expectations remain anchored. Tighter policy risks further weighing on growth, consumption and housing.
Monetary Policy: The RBNZ has raised the Official Cash Rate aggressively by 525 basis points to 5.50% since October 2021 to restrict demand and ease capacity constraints. The central bank left rates unchanged at its last four meetings, taking a wait-and-see approach as policy works its way through the economy. With inflation projected to remain elevated near 5%, the RBNZ may hike once more to 5.75% if high core inflation persists. Otherwise, rates are likely to remain on hold through 2024.
Geopolitical Landscape: New Zealand faces global headwinds from slowing growth in key trading partners like China and Australia. An escalation in geopolitical tensions or deepening global supply chain issues also pose downside risks. However, resilient commodity prices and agriculture demand help buffer export revenues. Meanwhile, the country’s success containing COVID supports its safe-haven appeal.
Technical Analysis: The CHF/JPY recently broke out above 170 resistance and is testing the 2021 high around 172, which aligns with the 38.2% Fibonacci retracement level. The bullish breakout in the pair suggests demand for safe-haven CHF remains strong amid global uncertainty, while the Bank of Japan’s ultra-accommodative policy weighs on JPY. Initial support holds around 169, with resistance at 172. RSI is rising into overbought territory, signalling upside momentum.
Upcoming Economic Events:
- Employment Change Q4 (Feb 6)
- GDP Growth Rate Q4 (Mar 15)
- Interest Rate Decision (Apr 26)
- Inflation Rate Q1 2024 (Apr 28)
Gavin Pearson
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Specialises in forex
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