Written by Convera’s Market Insights team
USD hits 11-week high
George Vessey – Lead FX Strategist
The US dollar extended its gains from last week following yet more robust economic data and hawkish comments by Federal Reserve (Fed) policymakers yesterday. The US currency rose to its highest in almost three months against other major currencies amid surging Treasury yields on growing expectations that the Fed is unlikely to cut interest rates as aggressively this year. Elsewhere, the Australian dollar has appreciated after the Reserve Central Bank said it could not rule out another rate hike.
Investors continue to scale back bets on rate cuts across the world this year. Unsurprisingly, Fed Chair Powell is particularly tuned in to the performance of the labour market, where robust job growth is sustaining wage growth and keeping upward pressure on service prices. Yesterday, Powell affirmed the Fed’s more hawkish 2024 rate view of three 25 basis point cuts this year. Fed funds futures now show roughly 115 basis points worth of easing priced in for 2024, down from about 150 at the end of last year. The hard data from the US continues to support this narrative and the US economic surprise index is at its highest in about three months. After the blowout US jobs report last Friday rattled markets and sent the dollar and bond yields soaring, data on Monday showed the US service sector expanded in January by the most in four months, helped by a pickup in orders and employment. A gauge of new orders placed with service providers, a proxy of future demand, rose to a three-month high of 55.
We also got the latest Senior Loan Officers’ Survey published yesterday, which showed banks incrementally tightening loan supply further, though at a slower pace. With no notable data out from the US today, we could see a modest bout of profit taking on the dollar given its recent rally.
Pound suffers worst two day drop in almost a year
George Vessey – Lead FX Strategist
The pound failed to find support from new labour market data yesterday, which revealed the UK’s unemployment rate was much lower late last year than previously thought. Although this might add to the Bank of England’s caution about cutting interest rates quickly, usually constructive for sterling, the UK currency has been at the mercy of a strong US dollar of late.
It’s more of a strong USD story at the moment but we’re wary of sterling falling further given technical analysis, seasonality and positioning. From a technical standpoint, GBP/USD has fallen below the support level of its 8-week trading range and closed below its 200-day moving average. A close below its 200-day moving average has historically resulted in a circa 1% decline in GBP/USD over the following 30 days. Seasonality trends also suggest February could be a challenging month for the pound with GBP/USD falling, on average, 0.5% since 2004. Plus, speculative traders hold an overcrowded bet on the pound appreciating, well above the long-term average, which paradoxically increases the risk of the pound depreciating if these bets are unwound sharply.
Elsewhere, price action in GBP crosses has also been unfavourable for the pound over the past few trading days despite traders paring bets on BoE rate cuts this year and the data flow confirming a robust start to 2024 for the services sector.
Euro weakens to 2 ½ month low
Ruta Prieskienyte – FX Strategist
The euro plunged to a new 2024 low against the US dollar on Monday as the unwinding of early Fed interest rate cut bets continues to favour the greenback. European stocks fell marginally on the day and German government bond yields moved up across the curve as investors reassessed their expectations for interest rate cuts and grappled with disappointing economic data from Germany.
The Sentix investor confidence index revealed that Eurozone investors’ morale improved for the fourth straight month in February, the highest level since April, signalling the region is heading for a mild recovery. However, deepening pessimism in Germany remains a concern as the country remains a drag on the region, pointing to a persistent economic crisis in the country. In addition, the broader trend reveals that the headline Sentix index has now remained in a negative territory for a record of 24 consecutive months, superseding even pessimism post-GFC. Elsewhere, Eurozone PPI inflation deepened once again in December, falling by 10.6% y/y versus market expectations of a 8.8% decline. On a monthly basis, producer prices declined by 0.8%, marking the largest fall since last May. As PPI typically serves as a leading indicator for the CPI, stronger deflationary pressures could soon feed through into headline and core CPI rates, thus acting as a tailwind for Eurozone inflation.
EUR/USD weakened to the lowest level in 2 ½ months, closing around $1.07420 level. Over that past two trading days the pair has suffered the largest cumulative 2-day loss since September 2023, mounting to 1.35% decline. Further downside cannot be overruled, and we could see EUR/USD could test December lows of $1.0721. However, a positive print on Eurozone retail sales and German industrial output could support the euro and minimise the damage thus far. Looking ahead, given the market still prices a 55% chance of an ECB rate cut in April, there is always a risk of a EUR positive back-up in short-term rates if that cut is removed. However, it is not clear when this will be. Only time, and data, will tell.
GBP/USD down over 1% in seven days
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: February 05-09
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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.
