March 26th 2024 forecast: Downward Pressure
Economic Performance: Growth Continues Despite Mixed Signals
The US economy expanded at a solid 3.2% annualised rate in Q4 2023, slightly below expectations but still showing resilience. Personal income rose a strong 1% month-over-month in January 2024, the largest increase in a year, driven by government benefits and higher asset income. However, personal spending growth slowed to 0.2% in January from 0.7% in December, suggesting a potential cooling in consumer demand.
Retail sales rebounded 0.6% in February after a 1.1% drop in January, but missed expectations of a 0.8% rise. Core retail sales used to calculate GDP were flat. Manufacturing activity remains sluggish, with the ISM Manufacturing PMI falling to 47.8 in February, firmly in contraction territory. Durable goods orders slumped 6.1% in January, the biggest drop since April 2020.
While the labour market remains tight, the unemployment rate ticked up to 3.9% in February. Inflation eased slightly but remains elevated, with the CPI rising 3.2% year-over-year in February. Core PCE inflation, the Fed's preferred gauge, decelerated to 2.8% in January.
Economic Health: Competitiveness Challenged by Trade Deficit and Inventories
The US trade deficit widened to $67.4 billion in January, the largest gap in nine months, as imports outpaced exports. This could weigh on GDP growth and suggests challenges in US competitiveness. Business inventories were flat in January after rising 0.3% in December, potentially signalling softer demand and production adjustments.
Capacity utilisation held steady at 78.3% in February, below its long-run average. The NFIB Small Business Optimism Index fell to a nine-month low of 89.4 in February, with inflation reported as the top concern. These indicators point to some fragility in the economy's health and resilience.
Central Bank: Fed Holds Rates Steady, Maintains Cautious Stance
The Federal Reserve maintained its target rate at 5-5.5% in March, signalling a wait-and-see approach as it assesses the impact of past hikes on inflation and growth. While the Fed still projects rate cuts later this year, it remains data-dependent and committed to bringing inflation sustainably to its 2% target. This cautious stance could keep borrowing costs elevated and weigh on growth in the near term.
Geopolitical Factors: Trade Tensions, Global Challenges Bear Watching
US-China trade relations remain a key focal point, with potential moves to blacklist more Chinese tech companies and shifts in agricultural trade patterns hinting at future frictions. The global push to regulate AI and data flows, as seen in recent UN and EU actions, could also impact US tech competitiveness.
Instability in regions like Haiti and Niger, where US security interests are at stake, bears monitoring. Divisions within the EU over defence spending and sanctions on Iran showcase the complex geopolitical landscape that could affect US foreign policy and economic ties.
Conclusion: Downward Pressure on Dollar Amid Economic Crosscurrents
The US economy is showing signs of resilience, but faces challenges from slowing consumer spending, manufacturing weakness, and a widening trade deficit. Inflation remains a concern, keeping the Fed cautious in its policy stance. Geopolitical risks related to China, global technology, and regional instability add to the complex outlook.
Key economic indicators to watch closely include:
Personal spending and income
Retail sales, especially core figures
Manufacturing PMIs and durable goods orders
Trade balance and business inventories
Inflation measures (CPI, PCE)
Labour market data
Based on the analysis and price history, the US dollar faces downward pressure going into next month. While the economy is still growing, the mixed data and global headwinds suggest the dollar may struggle to maintain its recent strength. This aligns with Trading Economics' forecast of the dollar index trending lower to 103.80 by the end of Q1 2024. Traders should monitor incoming data and global developments closely to assess any shifts in the balance of risks for the greenback.
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-