Too Early to Call Victory Says Powell
Market Analysis for Week Number 05 2024
DERBYSHIRE UK, Feb 01, 2024, Week 5. Welcome to Thursday. The latest economic indicators suggest the US is on track for a soft landing in 2024. While growth is moderating, key data points to resilience rather than recession. The Fed kept rates unchanged and noted reduced inflationary pressures. Markets are now pricing in potential rate cuts later this year. However, policymakers emphasised decisions will be data-dependent, pushing back on expectations of imminent easing. Geopolitical tensions persist but have thus far avoided major shock events. Overall, the global backdrop could support an orderly adjustment in financial markets this year.
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United States: On Track for Soft Landing
Economic Indicators: The latest economic data suggests the US economy remains resilient heading into 2024, although growth is moderating. The Fed funds rate was left unchanged for the fourth straight meeting at 5.25%-5.50% in January, and the central bank indicated rates will remain elevated until inflation moves sustainably to the 2% target. However, policymakers noted inflationary pressures have eased over the past year. GDP expanded at a better-than-expected 3.3% annualised pace in Q4 2023, driven by strong exports and business investment. Meanwhile, consumer spending and inventory accumulation slowed. The job market remains robust with the unemployment rate holding at a low 3.7% in December. However, hiring moderated from early 2023 levels. Overall, key indicators point to an economy that is transitioning to more sustainable growth without falling into recession.
Monetary Policy: The Fed remains strongly committed to achieving its 2% inflation goal but has shifted to a data-dependent approach regarding future rate moves. Policymakers removed prior language about needing ongoing hikes, signalling they are nearing the end of the tightening cycle. Markets expect a 25 bps rate cut in Q2 or Q3 2024. The central bank stressed decisions will be made on a meeting-by-meeting basis, pushing back on market expectations of cuts beginning in March. Rates are likely to remain elevated for some time until inflation moves convincingly down toward 2%.
Geopolitical Landscape: Key geopolitical risks heading into 2024 include rising tensions between Israel and Palestinian militant groups, growing strategic competition among major powers, and potential flashpoints in regional conflicts. However, the global geopolitical environment has so far avoided major shock events and outright conflict among great powers. This could support an orderly adjustment in financial markets in 2024. Much depends on avoiding miscalculations and keeping diplomatic channels open as powers including the US, China, and Russia jockey for position.
Technical Analysis: The DXY rallied strongly over the past week, breaking above 104.00 to reach its highest level in a month. The move reflects growing conviction that Fed rates will remain elevated for longer than previously anticipated. Immediate resistance is seen around 105.00, while support holds around 102.50. The technical picture suggests the DXY may trade in a range between those levels in the near term. However, the broader uptrend remains intact, and the DXY could challenge the 2022 peak above 114.00 later this year if inflation persists and the Fed maintains a hawkish stance.
Upcoming Economic Events:
1 days until the US Non-Farm Payrolls
1 days until the US Unemployment Rate
12 days until the US Inflation Rate
14 days until the US Retail Sales MoM
27 days until the US Monthly GDP MoM
48 days until the US Interest Rate
Canada: Cautious Optimism
Economic Indicators: The Bank of Canada has kept interest rates at 5% to combat lingering inflation concerns after core measures unexpectedly rose in December. Rates are projected to remain around 5% this quarter before declining toward 3% by 2025 as inflation eases. GDP contracted 0.3% in Q3 2023, marking the first decline since 2021, underscoring the economic impact of tight monetary policy. Another decline is expected in Q4 with growth resuming in 2024. Inflation ticked up to 3.4% in December, with the BoC expecting it to remain near 3% in H1 2024 before reaching its 2% target in 2025. The unemployment rate held at 5.8% in December, just below expectations, extending indications of a softening labour market.
Monetary Policy: The BoC has kept its benchmark rate at 5%, a 22-year high, for four consecutive meetings to combat stubborn inflation. It expects rates to remain restrictive despite clear economic slowing, as underlying inflation continues to be a concern. Gradual rate cuts likely won't begin until 2025 when disinflationary forces take firmer hold. The BoC is walking a tightrope between taming inflation and inducing recession.
Geopolitical Landscape: Heightened geopolitical tensions from events involving Iran have lifted oil prices and supported the Canadian dollar. Meanwhile, the pausing of UK-Canada free trade negotiations could negatively impact Canada's economic outlook if not resolved.
Technical Analysis: The USDCAD strengthened past 1.34, reaching a 3-week high, boosted by robust GDP growth and rising oil prices. The pair is expected to trade around 1.34 by quarter's end. The TSX Composite declined 0.97% to 21,021, mirroring US indexes as the Fed maintained high interest rates while signalling potential cuts later in 2024. The index remains up 0.47% month-over-month. The 10-year Canadian bond yield dropped to a 2-week low of 3.37% on Fed signals. The yield is projected at 3.13% by quarter's end. WTI Crude futures fell below $76/barrel on unexpected builds in US inventories before recovering on Middle East tensions. Oil has climbed over 6% year-to-date, lifting demand for the commodity-linked Canadian dollar.
Upcoming Economic Events:
8 days until the CA Unemployment Rate
19 days until the CA Inflation Rate
28 days until the CAP Monthly GDP MoM
34 days until the CA Interest Rate
Euro-Area Economic Outlook
Economic Indicators: The European Central Bank has kept interest rates unchanged at 4.5% in early 2024, a 22-year high level, as it aims to bring inflation back to the 2% target. Rates are expected to remain at 4.5% in the near-term before potentially trending down to around 2.25% by 2025. Meanwhile, Euro Area GDP growth stagnated in Q4 2023, avoiding a technical recession amid mixed performances across member states. Going forward, GDP is projected to expand around 0.3% in 2024 and 2025. On inflation, the harmonised rate ticked up to 2.9% in December after hitting a prior 2-year low, but remains on a downward trajectory expected to reach 2.1% by 2025.
Monetary Policy: The ECB concluded its rapid rate hike cycle in September 2022 but has maintained a hawkish stance given persistent inflationary pressures and geopolitical uncertainties. ECB President Lagarde stated it was premature to discuss rate cuts at this stage. Markets are pricing in potential rate cuts starting in Q2 2024 on the back of recent dovish signals from some policymakers about having tamed inflation. The benchmark rate is seen steady at 4.5% for now before cuts potentially materialise later this year.
Geopolitical Landscape: Key recent geopolitical developments in Europe include China receiving the Afghan Taliban envoy, Spain's parliament rejecting a proposed Catalan separatist amnesty bill, and the EU and partners pledging $10.8 billion for Central Asian transport links. Elsewhere, Brussels is looking into support for EU solar panel makers amid competition from cheap Chinese imports. Domestically, Italy's watchdog ruled ChatGPT breaches EU privacy laws. Tensions also remain around migration issues and EU relations with external powers.
Technical Analysis: After peaking above $1.10 in early January, EUR/USD has declined over 2% month-to-date to current levels around $1.08. The pair is facing technical resistance around the 200-day moving average, which aligns with the $1.09 handle. Support is seen around the recent low of $1.08. Sentiment remains pressured by market expectations for steady ECB policy and potential Fed rate cuts. However, the pair could consolidate and attempt to move higher on any hawkish surprises from the ECB. The EU50 index has rallied over 2% year-to-date, signalling improved growth prospects. Analysts see EUR/USD trading around $1.08 by end of Q1 and $1.04 in a year.
Upcoming Economic Events:
0 days until the EA Inflation Rate
0 days until the EA Unemployment Rate
5 days until the EA Retail Sales MoM
13 days until the EA Monthly GDP MoM
35 days until the EA Interest Rate
United Kingdom: Cautious Optimism Amid Global Headwinds
Economic Indicators: Key economic indicators for the UK show signs of moderating from recent highs, but risks remain tilted to the downside. Inflation has fallen from over 10% to 4%, but remains above the Bank of England's 2% target. Meanwhile, GDP growth is expected to slow to just 0.1-0.2% in Q4 2023 and Q1 2024. Unemployment has ticked up slightly but remains low by historical standards at 4.2%.
Retail sales and business confidence have declined, suggesting that higher interest rates and prices are weighing on demand. However, tighter monetary policy has yet to fully transmit through the economy. Overall, indicators point to a slowing of economic momentum, but inflation persistence poses an upside risk.
Monetary Policy: The Bank of England raised interest rates to over 5% in 2022-2023 to combat high inflation, making monetary policy restrictive. Rates are expected to remain elevated in the near term before cautious easing potentially begins in mid-2024 if inflation moderates further. However, officials emphasise that there is no room for complacency on inflation. Any easing is likely to be gradual and data-dependent. The central bank must balance bringing inflation back to target while avoiding an unnecessarily deep recession.
Geopolitics: Several geopolitical events could impact the UK economy and forex market outlook. Russia's war in Ukraine has disrupted energy supplies and boosted inflation globally. Meanwhile, tensions between the US and China add uncertainty. Domestically, the UK faces ongoing Brexit adjustments and risks to the global growth outlook. These developments could dampen trade flows, business and consumer confidence. However, a potential Iran nuclear deal could support global oil supplies while reduced geopolitical uncertainty could aid risk appetite.
Technical Analysis: GBP/USD has traded range bound so far in 2024 between 1.24-1.28 after falling from above 1.30 in late 2022. Price action suggests consolidation before a potential move higher, with upside targets around 1.31. However, downside risks remain if inflation persists or global growth slows further. Immediate support is seen around the 1.24-1.25 area. Overall, risks appear balanced in the near term but the path higher could resume if the UK economy stabilises and global tensions ease.
Upcoming Economic Events:
0 days until the UK Interest Rate
12 days until the UK Unemployment Rate
13 days until the UK Inflation Rate
14 days until the UK Monthly GDP MoM
15 days until the UK Retail Sales MoM
Switzerland: Cautious Optimism Amid Global Headwinds
Economic Indicators: The Swiss economy remains resilient despite weakening global growth. GDP expanded 0.3% in Q3 2023, driven by services and exports. However, growth is forecast to slow to 0.4-0.7% in 2024 as consumption and investment moderate. Inflation hit a three-decade high of 3% in 2022 but has since eased to 1.7%, though it is expected to remain above the SNB's 0-2% target range through 2023. The unemployment rate rose to 2.3% in December but is projected to increase further to 2.6-2.9% by 2025.
Monetary Policy: The SNB is maintaining its benchmark rate at 1.75% for now, judging monetary conditions appropriate given slowing inflation. However, policymakers may cut rates in 2024 if inflation stabilises near 2% and growth stagnates. The SNB remains concerned about persistent franc strength and may intervene if appreciation pressures resume.
Geopolitical Landscape: Swiss neutrality faces challenges from Russia's invasion of Ukraine, though alignment with EU sanctions has affirmed Switzerland's Western orientation. Looking ahead, clarity on EU relations and diversification of trade and financial flows will be key to navigating global fragmentation risks.
Technical Analysis: The franc remains robust, with USD/CHF trading around 0.86 after nearing the 0.83 mark in January. However, dollar strength may drive a rebound towards 0.89 by early 2024 as markets price in Fed rate cuts. In the long run, upside appears limited barring a deterioration in Swiss fundamentals.
Upcoming Economic Events:
6 days until the CH Unemployment Rate
12 days until the CH Inflation Rate
28 days until the CH Monthly GDP MoM
49 days until the CH Interest Rate
Japan's Prospects Amid Global Headwinds
Economic Indicators: Japan's key economic indicators show a mixed picture. Interest rates remain deeply negative at -0.1% as the Bank of Japan maintains its ultra-loose monetary policy. However, GDP contracted 0.7% quarter-over-quarter in Q3 2023, the first decline since Q3 2022, on weak private consumption and capital expenditure. Meanwhile, inflation has fallen from recent highs to 2.6% year-over-year in December, though still above the BoJ's 2% target. The unemployment rate declined to 2.4% in December, reflecting a tight labour market. Overall, the indicators point to an economy struggling with global headwinds despite solid fundamentals.
Monetary Policy: The Bank of Japan left its key interest rate unchanged at -0.1% in its January meeting, sticking to its yield curve control policy capping 10-year yields around 0% . It lowered its 2024 inflation forecast to 2.4% from 2.8% while nudging up its 2025 forecast, suggesting growing confidence in achieving its 2% target amid rising inflation expectations and wage growth. Comments from Governor Ueda hinted the BoJ may hike rates if this trend continues, though not imminently. The BoJ thus retains an ultra-loose stance for now but has set the stage for normalisation if inflation and wages keep rising.
Geopolitical Landscape: Several key geopolitical events could impact Japan's economy and markets. Diplomatic tensions with the US over a Trump presidential run could strain trade relations. Territorial disputes with China and Russia also persist. However, Japan enjoys strong relations with allies like Australia and faces no immediate military threats. On balance, geopolitical risks seem manageable for now but bear monitoring as unexpected flare-ups could spark market volatility.
Technical Analysis: USD/JPY has traded in a range between 139-151 over the past three months. It currently sits around 147, near the middle of that range. With the BoJ still far from tightening policy, downside appears limited barring a global growth shock, but upside also looks capped by Japan's weakening fundamentals. Trading Economics forecasts the pair at 144 by end-Q1 2024. Meanwhile, the Nikkei 225 is up over 7% year-to-date, reflecting optimism over corporate earnings and a weak yen. But with risks tilted to the downside, stocks could retreat on any negative surprises.
Upcoming Economic Events:
13 days until the JP Monthly GDP MoM
25 days until the JP Inflation Rate
28 days until the JP Unemployment Rate
47 days until the JP Interest Rate
Australia: On the Path to Slowing Growth
Economic Indicators: The Reserve Bank of Australia (RBA) maintained its benchmark interest rate at 4.35% in December 2023 to assess the impact of previous hikes. The RBA is monitoring slowing demand and above-target inflation, currently forecast by Trading Economics to remain around 4.35% in Q1 2024 before a long-term decline to 2.85% by 2025. GDP growth slowed to 0.2% quarter-over-quarter in Q3 2023 and is projected at 0.2% in Q4 2023 and 0.5-0.6% in 2024-2025 as consumption and trade activity cool. The unemployment rate ticked down to 3.9% in December but is expected to rise toward 4.9% by 2025 amid slowing growth.
Monetary Policy: The RBA aims to bring inflation back down toward its 2-3% target range but progress has been slower than expected, with underlying inflation still elevated from rising services costs. Further tightening remains data-dependent, with the RBA closely tracking global and domestic trends, inflation, and the labour market. Markets are pricing in steady rates near-term before cuts emerge later in 2024.
Geopolitical Landscape: Key events such as China-Taiwan tensions, the US election, and Middle East instability could heighten market uncertainty. China remains a major trade partner and destination for Australian commodity exports.
Technical Analysis: The AUD/USD is in a long-term downtrend but has found support above 0.65 recently. Prices show signs of basing with bullish divergence on technical indicators, which could signal a corrective bounce ahead of a broader downtrend resumption. Initial resistance is seen around 0.67 and 0.69. Trading Economics forecasts AUD/USD at 0.67 in Q1 2024 and 0.63 in a year's time on RBA easing prospects. Equity markets and bond yields have rallied on increased monetary easing bets.
Upcoming Economic Events:
5 days until the AU Interest Rate
14 days until the AU Unemployment Rate
34 days until the AU Monthly GDP MoM
83 days until the AU Inflation Rate
New Zealand: Cautiously Optimistic
Economic Indicators: New Zealand's key economic indicators show a mixed outlook. GDP growth is forecast to slow to 2.5% in 2023 as high inflation and rising interest rates weigh on private consumption. Unemployment remains very low at 3.3%, but inflation is projected to remain elevated at 5.3% this year before slowly declining. The current account deficit has deteriorated due to strong imports, reaching -4.7% of GDP in 2022. Overall, New Zealand faces headwinds from global growth and inflationary pressures, but still boasts a strong labour market.
Monetary Policy: The Reserve Bank of New Zealand (RBNZ) has aggressively tightened monetary policy, raising the Official Cash Rate by 525 basis points since October 2021 to 5.50% currently. The RBNZ notes demand has eased slightly but inflation remains well above its 1-3% target range. Further tightening may occur if high inflation persists, which would slow growth. However, the RBNZ also stands ready to cut rates if growth slows too sharply.
Geopolitical Landscape: New Zealand faces external risks from slowing global growth, inflation, and potential financial stability shocks that could significantly impact its economic outlook. Domestically, policies aim to promote inclusive and environmentally sustainable growth. Ongoing tax reforms, infrastructure investment, and productivity gains in key sectors like education can support these goals.
Technical Analysis: The NZD/USD currency pair recently bounced off the 0.6050 support level and shows potential for further upside near-term. The pair faces resistance around 0.6150, with support at 0.6110. Trading Economics forecasts the pair reaching 0.63 by end-2023. Overall sentiment appears cautiously optimistic the pair can climb despite external headwinds.
Upcoming Economic Events:
5 days until the NZ Unemployment Rate
27 days until the NZ Interest Rate
48 days until the NZ Monthly GDP MoM
75 days until the NZ Inflation Rate
Gavin Pearson
Retail trader since 2008
Specialises in forex
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