Important calendar events
Dollar price was volatile on Thursday. The dollar index rose to the 103.8 level in early trading but dropped below 103.0 later in the day as markets had time to digest Wednesday’s Fed announcement. US treasury yields continued to decline, with the US 10-year bond yielding approximately 3.87%.
The US Federal Reserve announced its monetary policy decision on Wednesday. The Fed kept interest rates unchanged on Wednesday, within a target range of 5.25% to 5.50%, which was in line with expectations.
The FOMC statement released after the meeting largely resembled the previous versions. Policymakers stated that the economy was expanding satisfactorily and that the labor market remained robust. The statement emphasized that inflationary pressures are easing but inflation remains at elevated levels. 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’s press conference after the meeting attracted a lot of attention as traders focused on the central bank’s forward guidance. Powell’s speech caused market volatility as the Fed Chair stated that there would be no rate cuts in March, dashing some investors’ hopes. Powell stated ‘I don’t think it’s likely that we’ll reach a level of confidence by the time of the March meeting, I don’t think that’s the base case’.
Rate cut expectations in March dropped rapidly after Powell’s statement, while market odds that the Fed will cut interest rates in May and June are rising rapidly. The dollar surged after Powell’s speech, which balanced out the FOMC statement’s dovish outlook. Markets had time to digest the Fed’s message on Thursday and Fed rate cut expectations drove the dollar down.
On the data front, US labor data released on Thursday were disappointing, putting pressure on the dollar. Unemployment Claims went up to 224K from 215K the week before, against expectations of a drop to 213 K. Preliminary Nonfarm Productivity went up by 3.2% in the final quarter of the year, exceeding expectations of a 2.4% growth. This is a measure of Productivity and labor-related inflation, which will result in increased price pressures down the line.
ADP Non-Farm Employment Change released on Wednesday fell short of expectations, dropping to 107K in January from 158K in December versus 145K forecast.
Robust US economic activity data boosted the dollar on Tuesday. CB Consumer Confidence in January rose above expectations, indicating that financial confidence is rising in the US. JOLTS Job Openings also exceeded expectations. Tuesday’s data showed that 9.03M new jobs opened in December in the US labor market up from 8.93M in November and against 8.73M anticipated.
Core PCE price index rose by 0.2% in December according to data released on Friday, which was in line with expectations. Core PCE price index dropped to 2.9% year-on-year in December from a 3.2% print in November. This is the Federal Reserve’s preferred inflation gauge, and a lower print indicates that price pressures in the US are easing.
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.
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.
EUR/USD gained strength on Thursday, climbing to the 1.087 level. If the EUR/USD pair declines, it may find support at 1.072, while resistance may be encountered near 1.093.
Headline inflation in the EU for January came in at 2.8% year-on-year according to data released on Thursday. 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.
Inflationary pressures in Germany are rising according to data released on Wednesday. German CPI rose by 0.2% in January against expectations of 0.1% growth. German retail sales fell by 1.6% in December against expectations of 0.6% growth. French consumer prices rose 3.4% year-on-year in January, which was, however, less than expected. French CPI dropped by 0.2% every month in January, indicating that French inflation is cooling.
The Eurozone economy does not show sufficient signs of recovery and is on the brink of recession. Preliminary GDP data released on Tuesday for the final quarter of 2023 showed that the Euro Area economy remained stagnant, narrowly avoiding recession. The German economy shrank in the final three months of 2023. Preliminary GDP data showed that the EU’s leading economy shrank by 0.3% in Q4 of 2023.
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. The Eurozone economy is struggling and cannot withstand much further tightening.
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. Markets anticipate rate cuts of around 140 bps in 2024. Odds of ECB rate cuts starting in April are rising, and markets are pricing 50bp of rate cuts by June.
GBP/USD surged to the 1.275 level after the BOE policy meeting on Thursday. If the GBP/USD rate goes up, it may encounter resistance near 1.270, while support may be found near 1.260.
The BOE maintained its official rate at 5.25% at its meeting on Thursday, as expected. MPC members, however, were more divided than ever. In December’s meeting seven members had voted to keep interest rates unchanged and two had voted to increase interest rates. This week, 6 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.
Markets interpreted this as a first sign that the BOE was considering a shift to a more dovish policy and the Sterling soared. 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 the notion that the central bank is preparing to cut interest rates before the summer.
BOE Governor Andrew Bailey delivered a speech that was less hawkish than usual. Bailey stressed that inflationary pressures are cooling, and further rate hikes are not required. Bailey also mentioned rate cuts for the first time, stating that policymakers do not need to bring inflation down to the central bank’s 2% target to start cutting interest rates, they just need to know that the process of disinflation is progressing.
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.
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.
USD/JPY dropped to the 146 level on Thursday as the dollar weakened. If the USD/JPY pair declines, it may find support near 144.3. If the pair climbs, it may find resistance near 148.8.
Economic activity data released on Wednesday for Japan were disappointing for the most part, putting pressure on the Yen. Preliminary data showed that Industrial Production in Japan expanded by only 1.8% in December against expectations of a 2.5% growth. Retail sales went up by only 2.1% year-on-year in December against 5.4% growth in November and expectations of a 5.0% print.
The BOJ Summary of Opinions, which outlines policymakers’ opinions expressed at the latest policy meeting, was published on Wednesday. According to the report, BOJ officials discussed the end of the central bank’s ultra-easy policy at the BOJ’s latest meeting last week. The possibility of ending negative interest rates was discussed at last week’s policy meeting, indicating that the BOJ is preparing to pivot to a more hawkish policy shortly.
Labor data released on Tuesday for Japan revealed that Japan's Unemployment rate fell to 2.4% in December from 2.5% in November, which was in line with expectations.
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’s comments increased market odds of a hawkish pivot later in the year.
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. PPI remained flat year-on-year in December, exceeding expectations, however, of a 0.3% decline. 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 slightly to 2.1% in December from 2.3% in November.
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
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