Important calendar events
The dollar edged higher last week, with the dollar index climbing above the 103.6 level mid-week but weakened towards the end of the week, closing near 103.3 on Friday. US treasury yields gained strength, with the US 10-year bond yielding approximately 4.13%. Fed rate cut expectations in March are declining, boosting the dollar and treasury yields.
Economic activity data released last week for the US were mostly positive, supporting the dollar. Prelim UoM Consumer Sentiment data on Friday showed that consumer sentiment in January exceeded expectations, indicating an improving economic outlook. Unemployment claims released on Thursday went down to 187K from 230K the week before, against expectations of a 206K print. Building permits went up to 1.50M on an annualized level in December from 1.47M in November.
Retail sales rose by 0.6% in December versus 0.3% in November and 0.4% anticipated according to data released on Wednesday. Core Retail Sales, which exclude automobiles, also exceeded expectations, showing that consumer spending in the US is rising. Core retail sales rose by 0.4% in December from a 0.2% growth in November and against expectations of a 0.2% print. Industrial Production, which is a leading indicator of economic health, also grew beyond expectations. Industrial production expanded by 0.1% in December after remaining stagnant in November and against predictions of a 0.1% contraction.
The Fed kept interest rates unchanged at its December meeting, within a target range of 5.25% to 5.50%. The Federal Reserve kept its policy settings unchanged at its latest meeting in December but showed signs of a dovish pivot.
Even though inflationary pressures remain high, markets are expecting a Fed pivot to a dovish stance this year. Market expectations of future rate cuts are one of the primary drivers of the dollar. Markets odds of a 25 bp rate cut in March dropped below 55% this week from 70% last week boosting US treasury yields and propping up the dollar.
Traders will be focusing on Fed members’ speeches in the next few weeks for hints into the Fed’s policy outlook. Fedspeak is likely to be hawkish in the weeks to come as the central bank may try to rein in market expectations of rate cuts.
FOMC member Christopher Waller stated that the Fed does not need to ease its stance as quickly as in the past, indicating that policymakers are not in a hurry to bring interest rates down. Policymaker Raphael Bostic stated on Thursday that the timing of Fed rate cuts would depend on how quickly inflation falls, but the baseline was for cuts to start in the third quarter of the year.
Headline inflation rose by 3.4% year-on-year in December from a 3.1% print in November against the expectation of a 3.2% raise. Monthly CPI rose by 0.3% in December, exceeding expectations of a 0.2% print. Core CPI, which excludes food and energy, rose by 0.3%, in line with expectations. Inflation in the US remains sticky and may put pressure on the Fed to keep interest rates at high levels for longer.
Core PCE price index rose by only 0.1% in November from a 0.2% growth in October against a 0.2% growth expected, bringing the annual rate to 3.2% from 3.4%. This is the Federal Reserve’s preferred inflation gauge and November’s print indicates that price pressures in the US are easing.
US Final GDP data showed that the US economy expanded by 4.9% in the third quarter of 2023. The US economy continues to expand, although growth was more modest than anticipated in Q3. Low economic growth may induce the Federal Reserve to pivot to a less restrictive monetary policy. Final GDP Price Index for the first quarter of the year was also revised lower, with a final print of 3.3% versus 3.6%. This is an indicator of inflation, and a lower print indicates cooling price pressures in the US.
EUR/USD edged lower last week, dropping to the 1.085 level. If the EUR/USD pair declines, it may find support at 1.084, while resistance may be encountered near 1.100.
ECB policymakers voted to keep interest rates unchanged at 4.50% in December. Markets are starting to price in rate cuts this year, although ECB officials insist that discussions on a rate cut timeline have not started yet. ECB policymakers have also stressed the need to bring Euro area inflation down to the ECB’s 2% target by keeping interest rates at sufficiently restrictive levels for as long as necessary.
The minutes of December’s ECB meeting were released on Thursday and pointed to interest rates staying at high levels for some time, as policymakers are concerned about persistent inflationary pressures in the Eurozone.
The ECB will announce its interest rate decision this week on the 25th and the central bank is expected to keep interest rates the same. The ECB conference after the conclusion of the meeting will attract traders’ attention looking for hints into the central bank’s future policy. The ECB is expected to pivot to a more dovish policy later this year but the time for that is still uncertain.
ECB rhetoric last week was hawkish, indicating that the central bank is not ready to pivot to a more accommodating policy. ECB President Christine Lagarde has stated that the central bank is making progress in steering inflation back to its 2% target but has emphasized that further efforts are required. In an interview in Bloomberg on Wednesday, Lagarde stated that ECB officials would likely support interest rate cuts in the summer, disappointing expectations of a dovish pivot in the spring.
ECB’s Joachim Nagel stated on Monday that it was too early to talk about rate cuts boosting the Euro. Nagel also stressed that inflation was still considered too high by policymakers and warned that markets are sometimes ‘over-optimistic’. Policymaker Robert Holzmann was also hawkish this week, stating that markets should not count on borrowing costs falling this year. Dutch central bank chief Klaas Knot also expressed the view that financial markets are preemptively factoring in monetary easing measures.
Final EU CPI data released on Wednesday tallied with the Flash CPI data released at an earlier date. Eurozone inflation remains sticky, indicating that the ECB still has some ground to cover to ensure that inflation drops sustainably. EU Final CPI for December came at 2.9% year-on-year from 2.4% in November. Core Flash CPI for December dropped to 3.4% from a 3.6% print in November, which was in line with expectations.
German inflation data released on Monday surprised on the upside, increasing the odds that the ECB will keep interest rates at high levels for some time. German headline inflation rose to 3.7% in December from 3.2% in November. Economic sentiment seems to be improving in the Eurozone, however. Both the Eurozone ZEW Economic Sentiment and the German ZEW Economic Sentiment exceeded expectations, pointing to an increased economic outlook.
The economic outlook of the Eurozone appears to be deteriorating and may force the ECB to pivot to a more dovish policy. The Eurozone economy does not show signs of recovery and is on the brink of recession. Revised GDP for the Euro area showed that the Eurozone economy contracted by 0.1% in the third quarter of the year, which was in line with expectations. The Eurozone economy barely expanded in the second quarter by 0.1%, after contracting by 0.1% in Q1 of 2023. Year-on-year the EU economy registered stagnation with GDP flat at 0%. The Eurozone economy is struggling and cannot withstand much further tightening.
The Sterling weakened against the dollar last week. GBP/USD trade dropped to the 1.260 level mid-week but rallied towards the end of the week, climbing back to the 1.270 level. If the GBP/USD rate goes up, it may encounter resistance near 1.278, while support may be found near 1.260.
British inflation surprised to the upside on Wednesday, indicating that price pressures in the UK are not easing according to the BOE’s expectations. Headline inflation rose to 4.0% year-on-year in December from 3.9% in November, against expectations of a 3.8% print. This marked the first rise in consumer inflation in 10 months, increasing the odds the BOE will keep interest rates at high levels for longer. Annual Core CPI, which excludes food and energy, grew at the same pace of 5.1% in December as in November, beating the 4.9% forecast.
According to data released on Friday, British Retail Sales dropped unexpectedly in December, registering the biggest monthly drop since January 2021. Retail Sales volumes shrank by 3.2% in December against expectations of a 0.5% drop. Disappointing sales data raised concerns about the British economy, resurrecting fears that the country may have entered recession in the final month of the year.
British Average Earnings data released on Tuesday revealed a drop in wages in the UK. British wage growth slowed to 6.5% during the three months ending in November from a print of 7.2% in the three months ending in October. At the same time, unemployment in the UK remained steady at 4.2%.
The British economy remains fragile, reinforcing the notion that the BOE has reached its peak interest rates. Monthly GDP rose more than expected in November, however, inspiring more optimism on the UK’s economic outlook. The British economy expanded by 0.3% in November against expectations of a 0.2% growth and 0.3% contraction in October. Final quarterly GDP data revealed that the British economy contracted by 0.1% in the third quarter of 2023, against expectations of stagnation. The British economy expanded by 0.3% in the first quarter of the year and 0.2% in the second quarter.
The BOE maintained its official rate at 5.25% at its latest policy meeting, which was in line with expectations. The central bank’s outlook remains hawkish, however, with three policy members voting to increase interest rates versus six members voting to maintain current rates.
BOE Governor Andrew Bailey has kept his hawkish stance, stressing that inflationary pressures in the UK remain high and that further tightening might be required to bring inflation down to the bank’s 2% target.
The BOE has likely reached its rate ceiling but will keep interest rates on hold for a long time to bring inflation down. Even though the current restrictive policy is hurting economic growth, the BOE has no choice but to continue its battle against inflation.
Market expectations of the BOE’s future direction reflect the need to keep interest rates in restrictive territory for longer. The BOE policy is starting to diverge from that of the FED, with market odds in favor of Fed rate cuts starting in March, but BOE rate cuts are not expected before May.
USD/JPY surged last week as the dollar rallied while the Yen weakened, and the currency pair rose to the 148.1 level. If the USD/JPY pair declines, it may find support near 144.3. If the pair climbs, it may find resistance near 149.7.
The BOJ has been keeping interest rates at a negative level, putting pressure on the Yen. The BOJ kept its policy settings unchanged at its December meeting. The central bank kept its short rate target steady at -0.10% and its yield curve control unchanged. The BOJ has also stated that it would reduce the amount of bonds it buys in its regular operations in the January-March quarter.
The BOJ’s forward guidance into 2024 was more dovish than expected, putting pressure on the Yen. BOJ Governor Kazuo Ueda has kept a dovish stance, indicating that a policy pivot is not on the cards yet. Ueda has stated that economic growth remains modest and that underlying inflation will gradually increase, but the BOJ requires sustainable, stable inflation before tightening its monetary policy.
Inflation data released last week for Japan indicated that inflationary pressures are not sufficiently high in Japan to justify a shift to a more hawkish policy yet. PPI remained flat year-on-year in December, exceeding expectations, however, of a 0.3% decline. National Core CPI data on Friday showed that Japanese inflation cooled further in December with headline inflation at 2.3% year-on-year from a 2.5% print in November. Tokyo Core CPI also dropped slightly to 2.1% in December from 2.3% in November.
The BOJ will announce its next monetary policy decision this week on the 23rd. The central bank is expected to leave all policy levers untouched and market participants will focus more on the BOJ’s forward guidance.
The BOJ will also release the first Quarterly Outlook for Economic Activity and Prices Report for 2024 on Tuesday. This report will provide important insight into Japan’s economic outlook and the BOJ’s future policy direction.
The Fed has signaled a dovish pivot, relieving some of the pressure on the Yen, which has been weakened by the BOJ’s dovish policy. The BOJ has so far maintained its dovish bias, putting more pressure on the Yen as other major central banks, and especially the Fed, have raised interest rates to high levels.
Final GDP data for the third quarter of the year showed that Japan's economy contracted by 0.5% in the third quarter against earlier estimates of a 0.5% contraction. The Japanese economy expanded by 1.2% in the second quarter of 2023, showing that the country’s economy is shrinking and is on the brink of recession. Final GDP Price Index showed a 5.3% annual expansion in Q2, versus 3.5% the previous quarter. This is a measure of inflation, which shows that inflationary pressures are rising in Japan, increasing the odds of a hawkish shift in the BOJ’s policy.
Gold prices exhibited high volatility last week, dropping to $2,001 per ounce mid-week, then bouncing back to $2,026 per ounce by the end of the week. If gold prices increase, resistance may be encountered near $2,060 per ounce, while if gold prices decline, support may be encountered near $2,000 per ounce. Gold prices seesawed last week, boosted by Middle Eastern tensions, while pushed down by rising US dollar and treasury yields.
Gold prices are propped up by rising geopolitical tensions, which raise the appeal of safe-haven assets. The violence in Gaza is showing no signs of abating. Concerns that the Geopolitical crisis in the Gaza area may spread to neighboring countries are raising demand for safe-haven assets, boosting gold prices. The war between Israel and Hamas is threatening to spill over the Middle East as tensions rise in the Red Sea area.
Attacks on ships in the Red Sea area by Yemen's Iran-backed Houthi militia increase concerns that the crisis will widen to other areas in the region. The US and the UK have launched a coordinated action against Houthi rebels in Yemen. The coalition delivered a series of air and sea strikes against Houthi targets in Yemen, risking retaliation from Iran. The US put Houthi rebels back on its list of terrorist groups on Wednesday, as the militants attacked their second US-operated vessel in the Red Sea region this week.
Gold prices have been predominantly directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar edged higher last week, with the dollar index climbing above the 103.6 level mid-week but weakened towards the end of the week, closing near 103.3 on Friday. US treasury yields gained strength, with the US 10-year bond yielding approximately 4.13%. Fed rate cut expectations in March are declining, boosting the dollar and treasury yields.
Increases in central banks’ interest rates put pressure on gold prices since assets yielding interest become a more appealing investment compared to gold as interest rates rise. Expectations that the Fed may start cutting interest rates from the first quarter of 2024 are propping up gold prices.
The Fed kept interest rates unchanged at its December meeting, within a target range of 5.25% to 5.50%. The Fed’s forward guidance was more dovish than expected, hinting that the central bank is preparing to pivot to a less restrictive monetary policy. Market expectations of future rate cuts fluctuate strongly, affecting gold prices. Markets odds of a 25 bp rate cut in March dropped below 55% this week from 70% last week boosting the US dollar and treasury yields and pushing gold prices down.
Oil prices gained strength last week, with WTI price closing near the $73.2 per barrel level on Friday. If WTI price declines, it may encounter support near $70 per barrel, while resistance may be found near $75.1 per barrel.
US crude oil inventories released on Thursday showed a large draw in US crude stockpiles, boosting oil prices. The US Energy Information Administration reported that weekly crude stocks fell by 2.5M barrels for the week to January 12th, falling short of expectations of a drop by 0.6M barrels.
Oil demand outlook increased last week, as the International Energy Agency (IEA) joined the producer group OPEC in forecasting strong growth in global oil demand. The IEA monthly report stated that oil demand is expected to grow by 1.24M barrels per day in 2024, up by 180K barrels per day from its previous projection. OPEC also reported a high oil demand forecast on Wednesday, expecting a growth in demand of 2.25M barrels per day this year.
Supply concerns also boost oil prices, as the crisis in the Gaza area threatens to disrupt oil distribution. Geopolitical tensions are rising in the Red Sea, spilling over the region from the war in Gaza. Tensions around the Red Sea area have been rising in the past few weeks, raising concerns that hostilities may spread in the Middle East, affecting oil supply and distribution.
Iran-backed Houthi militants are attacking commercial vessels in the Red Sea. The US and the UK have launched a coordinated action against Houthi rebels in Yemen on Thursday night. The coalition delivered a series of air and sea strikes against Houthi targets in Yemen, risking retaliation from Iran. The US put Houthi rebels back on its list of terrorist groups on Wednesday, as the militants attacked their second US-operated vessel in the Red Sea region this week.
China’s poor economic outlook is increasing concerns of reduced oil demand, putting a lid on oil prices, despite increasing geopolitical risks. Weak economic growth in China raised concerns about future demand on Wednesday, pushing oil prices down. China’s GDP data released on Wednesday were disappointing, showing that the country’s economy remains sluggish. China’s economy expanded by 5.2% year-on-year in the final quarter of 2023, which fell short of expectations, lowering the oil demand outlook.
Oil prices are kept in check by a strong US dollar and high-interest rates. Most major central banks, however, are hitting pause on rate hikes, boosting oil prices. The Fed kept interest rates unchanged at its December meeting, within a target range of 5.25% to 5.50%. Market expectations of future rate cuts increase oil demand outlook, boosting oil prices. In addition, OPEC+ producers have agreed to voluntary cuts of over 2 million barrels per day to boost oil prices, extending already existing output cuts into the first quarter of 2024 and adding even more.
Anticipation of the approval of Bitcoin spot exchange-traded funds (ETFs) by the Securities and Exchange Commission (SEC) triggered market volatility last week. The SEC approved 11 applications last week, including those from BlackRock, Ark Investments, and Fidelity. News of the approval boosted not only Bitcoin but other cryptocurrencies as well.
The enthusiasm over the approvals did not last long, however, and a massive Bitcoin selloff was triggered soon after the approval last week. Crypto markets steadied at the beginning of this week but are starting to deflate again as the boost they received in the past few weeks from the hype created over the approval of Bitcoin spot ETFS is fading.
The approval of the first spot Bitcoin ETFs is drawing investors’ attention and is likely to bring more institutional and retail money into crypto markets. Spot Bitcoin ETFs give access to the cryptocurrency to traders through a regulated product, eliminating the risks of buying from unregulated exchanges.
Bitcoin price plummeted last week, testing the $41,000 support over the weekend. If BTC price declines, further support can be found at the key $40,000 level, while resistance may be encountered near $44,000.
Ethereum price also weakened last week, testing the $2,450 level support during the weekend. If Ethereum's price declines, it may encounter further support near $2,200, while if it increases, resistance may be encountered near $2,700.
Crypto markets are under pressure by rising geopolitical tensions. The war between Israel and Hamas is threatening to spill over the Middle East as tensions rise in the Red Sea area. Concerns that the Geopolitical crisis in the Gaza area may spread to neighboring countries drive risk sentiment down putting pressure on risk assets. The US and the UK have launched a coordinated action against Houthi rebels in Yemen. The coalition delivered a series of air and sea strikes against Houthi targets in Yemen, risking retaliation from Iran.
Increases in central banks’ interest rates are putting pressure on risk assets. Most major central banks, however, are hitting pause on rate hikes, propping up crypto markets. The Fed kept interest rates unchanged at its December meeting, within a target range of 5.25% to 5.50%.
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Written by:
Myrsini Giannouli
présence dans l'industrie en tant que fournisseur de liquidités
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