Important calendar events
The dollar rallied on Thursday on strong US economic data, with the dollar index climbing above the 103.5 level. US treasury yields remained steady on Thursday, with the US 10-year bond yielding approximately 4.11%.
US GDP data released on Thursday surprised to the upside, boosting the dollar. 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 data were also released on Thursday and fell below expectations. This is an indicator of inflation, and a lower print indicates cooling price pressures in the US. 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.
Robust economic activity data released on Wednesday provided support for the dollar. Both Manufacturing and Services PMI data surprised the upside, indicating an improved economic outlook. Flash Manufacturing PMI for January rose above the threshold of 50 which denotes industry growth with a print of 50.3 up from 47.9 in December and against the 47.6 expected. Flash Services PMI for January rose to 52.9 from 51.4 in December exceeding expectations of a 51.4 print.
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 fluctuate wildly and are one of the primary drivers of the dollar. Markets odds of a 25 bp rate cut in March dropped to approximately 55% on Tuesday, boosting the dollar and treasury yields.
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.
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.
The Euro dipped on Thursday after the ECB rate decision and the EUR/USD dropped to the 1.084 level. If the EUR/USD pair declines, it may find support at 1.072, while resistance may be encountered near 1.095.
The ECB announced its interest rate decision on Thursday and the central bank kept interest rates unchanged at 4.50% as expected. The ECB press conference following the conclusion of the meeting did not hold many clues on the ECB's policy direction. ECB President Christine Lagarde stated that the 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 starting to price 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 125 bps in 2024. Odds of ECB rate cuts starting in May are currently split, but markets are pricing in a rate cut in June with almost 100% probability.
Economic activity data released on Wednesday for the Euro area were disappointing, indicating diminishing economic growth. Flash Manufacturing PMI in January remained firmly in contractionary territory, with a print of 46.6, well below the threshold of 50 that denotes industry expansion. January’s Manufacturing PMI, however, was above December’s 44.4 reading, indicating that the manufacturing sector is shrinking at a reduced pace. Flash Services PMI data for January were less optimistic though, with a 48.4 print, down from 48.8 in December and against expectations of a 49.1 print.
Final EU CPI data for December showed that 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.
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.
GBP/USD edged lower on Thursday, dropping below the 1.269 level. If the GBP/USD rate goes up, it may encounter resistance near 1.278, while support may be found near 1.260.
Robust UK fundamentals boosted the Sterling on Wednesday. Flash Manufacturing PMI data for January showed that the British manufacturing sector remains in contractionary territory, but the sector is shrinking at a reduced pace. Manufacturing PMI rose to 47.3 in January from 46.2 in December, against 46.7 expected. The Services sector continued to expand in January, with a print well above the threshold of 50. Services PMI rose to 53.8 in January from 53.4 in December versus 53.1 expected.
Public Sector Net Borrowing data on Tuesday showed that Britain’s budget deficit for December was lower than expected, increasing chances of tax cuts in March’s budget. Public Sector Net Borrowing dropped to 6.8B in December from 12.8B in November against expectations of 11.4 B.
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.
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 a 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 traded sideways on Thursday, oscillating around the 147.6 level. If the USD/JPY pair declines, it may find support near 145.5. If the pair climbs, it may find resistance near 148.8.
Japanese Government 10-year bond yields have been rising after the BOJ meeting on Tuesday, boosting the Yen. The BOJ kept all policy levers unchanged on Tuesday, maintaining its ultra-easy monetary policy. The BOJ has been keeping interest rates negative, 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 delivered a speech with hawkish undertones on Tuesday, hinting 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. The Yen gained strength on Tuesday after Ueda’s Press Conference but plummeted again as markets pondered the uncertainty of a policy shift.
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.
The BOJ also released Tuesday's first Quarterly Outlook for Economic Activity and Prices Report for 2024. In the Quarterly Outlook, the BOJ lowered its forecasts for core inflation from 2.8% to 2.4% in 2024. The Report hinted that consumer inflation in Japan is likely to increase towards the central bank’s target based on wage growth.
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
presença na indústria como Provedor de Liquidez
e execução confiável
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