Written by Convera’s Market Insights Team
Good data to start the week
Boris Kovacevic – Global Macro Strategist
Dovish Fed speak, lower inflation expectations and better than expected data out of China have helped global equities push higher, weighing on the recently strong US dollar. The S&P500 rose by 1.58%, erasing more than half of its losses that occurred over the past two weeks. The Japanese Nikkei followed suit and surged by 1.44% to a new 34-year high. 10-year government bond yields are down so far this week, helping investors justify higher stock prices.
The US labor market report failed to sway markets in one or the other direction when it comes to gauging how likely the Federal Reserve is to cut its policy rate in March. While the headline number remained solid, showing job growth of 216 thousand, the underlying momentum based on the details of the report and alternative data are starting to signal some weakness ahead. The good news on the data front yesterday came from the New York Fed’s latest Survey of Consumer Expectations, which showed consumers inflation expectations falling to the lowest level in 3 ½ years from 3.4% in November to 3.0% in December. Fed officials like Bostic and Bowman joined the chorus of US policy makers who acknowledge the recent fall of inflation, stating that the currently restrictive policy is sufficient to bring price growth back to target.
Falling inflation expectations backed by reasonably dovish Fed speak has helped equities move higher without putting the strong dollar narrative at risk. DXY barely fell in yesterday’s trading and has already regained almost all the losses in early trading today. More surprisingly, expectations of a Fed cut in March have fallen from 65% to 57%, explaining some of the dollar resilience.
Europe headed for a mild recovery
Ruta Prieskienyte – FX Strategist
The Euro consolidated around €1.095 as renewed risk on mode saw US dollar trade soften during Monday’s session. European stocks posted modest gains and the German 10-year government bond yield rose to a fresh 3-week high. EUR/USD continues to benefit from expectations that the European Central Bank (ECB) will keep interest rates at record highs for some time, bolstered by the expected jump in the Eurozone inflation last month. Adding to this, ECB official Boris Vujcic said on Monday that the central bank does not foresee cutting interest rates before the summer and anticipates a gradual reduction in inflation within the Eurozone.
On the economic front, the Sentix Investor Confidence Index revealed that Eurozone investors’ morale improved for a third straight month in December, signalling the region may be heading for a mild recovery. However, selling price expectations across all sectors increased and, apart from industry, remain significantly above their long-term average. Consumer inflation expectations also increased, after having declined in the three months before. Overall, the current situation remains fragile with momentum weak. The headline Sentix index has remained in a negative territory for a record of 23 consecutive months, superseding even pessimism post-GFC. In addition, retail sales in the Euro Area contracted by 0.3% m/m in November of 2023 to mark the sharpest decline in retail volume since August. On an annual basis, retail sales fell by 1.1%, marking the 14th consecutive period of contraction.
With German industrial production print out this morning disappointing investors, we see further EUR/USD downside in the immediate term. The pair is facing a resistance barrier at 14-day SMA €1.0997 with short-term support seen at 35-day and 200-days SMAs at €1.0927 and €1.0845, respectively. Meanwhile, EUR/GBP extended its losses from last week falling towards a 3-week low and is currently down 1.0% YTD.
Pound ignores weak festive season
Boris Kovacevic – Global Macro Strategist
The pound continued to climb higher versus the US dollar and euro without any meaningful regional data to stand in its way. GBP/USD appreciated for the fourth consecutive day and is currently trading around $1.2740. The only data point before the release of the UK GDP number later this week has come in the form of the BRC-KPMG Retail Sales Monitor, which showed retailers suffering a disappointing festive season.
Continued reluctance of the consumer to spend has reduced retail sales growth to just 1.7% in December with food sales coming in below their average (8.1%) at 6.8%. As we said yesterday, this data point has not moved markets as external factors continue to dominate pound-related currency pairs. The current uptrend cable is enjoying faces some resistance at levels around $1.28, with the support area being around $1.2610-$1.2640.
Stocks pushing higher, dollar remains resilient
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: January 08 – 12
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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.
