Written by Steven Dooley and Shier Lee Lim
Fed, ECB minutes due
FX markets were mostly quiet on Friday with the greenback moderately lower as the USD index fell from three-month highs.
Central bank commentary will be critical this week with the US Federal Reserve and European Central Bank minutes both due.
FX volatility has been quiet to start the new year but shifts in expectations around central bank policy could trigger more significant moves.
In the US, expectations for rate cuts have eased so far this year as stronger US data boosts optimism around the US economy.
On the other hand, poor growth in Europe has seen markets look to potential rate cuts in the Eurozone, pushing the euro lower.
US financial conditions now easier
One reason for the US economy’s recent outperformance in short-term growth indicators like the key purchasing manager index (PMI) releases is thanks to an improvement in financial conditions.
As of 4Q23 and 1Q24, US financial conditions have changed from being a headwind to a tailwind for growth.
In addition to the robust credit creation that has been observed since the year’s beginning, this suggests that there are upside risks to the GDP and inflation projections for the upcoming quarters.
The monthly PMI numbers are due again on Thursday – with US data likely to be closely scrutinized. Australian, Japanese and European numbers are also released.
Yen in focus as BoJ mulls exit
Even while BOJ Deputy Governor Uchida’s upbeat outlook on the economy and pay talks still suggests the BOJ is very likely on track to remove its negative interest rate policy (NIRP) by the April meeting, his speech last week did not raise market expectations for a March NIRP removal.
The market continues to view April as the most likely date for the elimination of the NIRP, which is still some distance off, and good US economic data further supports the dollar. As a result, USD/JPY moved well.
From this point on, we anticipate that Ministry of Finance representatives would intervene verbally to stop more JPY weakening, and as the JPY falls and stock prices increase in March, the BOJ may decide to explore an early withdrawal of the NIRP.
Greenback reverses from three-month highs
Table: seven-day rolling currency trends and trading ranges
Key global risk events Calendar: 19 – 23 February
All times AEDT
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
