Important calendar events
The dollar remained firm on Monday, with the dollar index hovering around the 104.1 level. US treasury yields edged higher, with the US 10-year bond yielding approximately 4.16%.
The US Federal Reserve kept interest rates unchanged at its meeting in January, within a target range of 5.25% to 5.50%. The Fed, however, has removed the tightening bias from its policy statement, indicating that the central bank is preparing to pivot to a less restrictive monetary policy. The Fed’s outlook has become dovish, pushing the dollar and treasury yields down. Fed Chair Jerome Powell quickly disabuses markets of the notion that rate cuts are imminent. In his press conference, Powell discounted the possibility of a rate cut in March.
FOMC members’ opinions are starting to diverge, and we may see a battle of doves against hawks at the next policy meeting. For the first time, policymakers are discussing openly the possibility of rate cuts sometime this year. Even though most FOMC members agree that they are not yet ready to start reducing interest rates, markets are interpreting the change in rhetoric as a sign that the Fed is considering a pivot to a more dovish policy.
Rate cut expectations have been fluctuating strongly in the past couple of weeks. Odds of a rate cut in March are down to 15% from over 50% two weeks ago. Rate cut odds in May are also down to 50% from over 80% a few weeks ago. In addition, only 25 basis points of rate cuts are priced in by May, against 25-50bp before. Market expectations of rate cuts are becoming more moderate as policymakers have stated that they intend to start reducing interest rates slowly.
US fundamentals will affect the dollar strongly in the weeks to come as these are likely to influence the Fed’s future policy. This week, markets will be focusing on the US inflation report on the 13th. Headline inflation is expected to drop to 2.9% year-on-year in January from 3.4% in December. Such a significant drop in inflation may reignite Fed rate cut expectations despite the Fed’s hawkish stance.
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.
Advance GDP for the final quarter of 2023 showed that the US economy expanded by 3.3% against the expectation of a more modest 2.0% growth. The US economy is expanding at a slower pace, as final GDP data have shown expansion by 4.9% in the third quarter of 2023, but economic growth in Q4 of 2023 exceeded expectations. Advance GDP Price Index for the final quarter of 2023 came in at 1.5% against expectations of 2.3% and a final print of 3.3% in the previous quarter. This is an indicator of inflation, and a lower print indicates cooling price pressures in the US.
The Euro traded sideways against the dollar on Monday, with EUR/USD oscillating around the 1.078 level. If the EUR/USD pair declines, it may find support at 1.072, while resistance may be encountered near 1.089.
The ECB kept interest rates unchanged at 4.50% as expected at its January meeting. The ECB press conference following the conclusion of the meeting did not hold many clues on the central bank’s policy direction. ECB President Christine Lagarde stated that interest rates are currently at sufficiently high levels to bring inflation down to the central bank’s 2% target over time. Lagarde also reiterated that ECB interest rates will remain at sufficiently restrictive levels for as long as necessary.
Markets are pricing in rate cuts this year, although ECB policymakers are concerned about persistent inflationary pressures in the Eurozone. The ECB is expected to pivot to a more dovish policy later this year, but the timeline is still uncertain.
Headline inflation in the EU came in at 2.8% year-on-year in January. Eurozone inflation dropped from 2.9% in December, although markets were anticipating an even lower 2.7% print. Core inflation, which excludes food and energy, cooled to 3.3% from 3.4% in December, which again was just above the 3.2% expected.
The Eurozone economy does not show sufficient signs of recovery and is on the brink of recession. Preliminary GDP data for the final quarter of 2023 showed that the Euro Area economy remained stagnant, narrowly avoiding 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.
GBP/USD traded sideways with low volatility on Monday near the 1.263 level. If the GBP/USD rate goes up, it may encounter resistance near 1.270, while support may be found near 1.250. Markets were quiet on Monday ahead of Tuesday’s US and Wednesday’s UK inflation data.
The BOE maintained its official rate at 5.25% at its latest meeting, as expected. MPC members, however, were more divided than ever. Six members voted to keep rates unchanged, two voted in favor of a 25bp rate hike and one member voted in favor of a 25bp rate cut.
In addition, the BOE updated its inflation outlook, predicting that inflation will drop to the BOE’s 2% target in the second quarter of the year. This reinforced that the central bank is preparing to cut interest rates before the summer.
BOE Governor Andrew Bailey has stressed that inflationary pressures are cooling and that further rate hikes are not required. Market expectations of BOE rate cuts are putting pressure on Sterling. Markets had been pricing in aggressive rate cuts of over 100 basis points this year. In the past week, however, rate cut expectations have become more moderate, dropping to 80bp.
On the data front, British headline inflation rose to 4.0% year-on-year in December from 3.9% in November, against expectations of a 3.8% print. 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.
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.
This week the GBP/USD is expected to depend greatly on the release of the US inflation report on Tuesday, as well as on British inflation data on Wednesday.
USD/JPY edged higher on Monday, touching the 149.4 level. If the USD/JPY pair declines, it may find support near 147.6. If the pair climbs, it may find resistance near 150.
The BOJ kept all policy levers unchanged at its January meeting, maintaining its ultra-easy monetary policy. The BOJ has been keeping interest rates at a negative level, putting pressure on the Yen. The BOJ has so far maintained its dovish bias as other major central banks, and especially the Fed, have raised interest rates to high levels.
BOJ Governor Kazuo Ueda has hinted at a policy shift down the road. Ueda stated that the likelihood of Japan sustainably achieving the bank's 2% inflation target was gradually increasing. Ueda has also stated that there is a high chance for easy monetary conditions to continue even after the central bank ends its negative interest rate policy.
An immediate policy shift is not expected yet, but markets are pricing in the first BOJ rate hike in April with over 50% probability. A rate hike by June is considered almost certain, with market odds giving over 90% probability of a shift in the BOJ’s monetary policy by June. Only a small rate hike of 10bps is considered likely, which would bring the BOJ’s interest level from negative to zero.
Inflationary pressures are not sufficiently high in Japan to justify a shift to a more hawkish policy yet. National Core CPI data 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 to 1.6% in January from 2.1% in December.
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.
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Written by:
Myrsini Giannouli
चलनिधि प्रदाता के रूप में उद्योग उपस्थिति
और विश्वसनीय निष्पादन
ग्राहक धन
ग्राहक सहायता
अब आप जो वेबसाइट देख रहे हैं, वह टॉपएफएक्स ग्लोबल लिमिटेड द्वारा संचालित है, एक इकाई जो सेशेल्स के वित्तीय सेवा प्राधिकरण (एफएसए) द्वारा प्रतिभूति डीलर लाइसेंस संख्या एसडी037 के साथ विनियमित है जो यूरोपीय संघ में स्थापित नहीं है या यूरोपीय संघ के राष्ट्रीय सक्षम द्वारा विनियमित है। प्राधिकरण।
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