Written by Convera’s Market Insights Team
Fed meets as US economy excels
Boris Kovacevic – Global Macro Strategist
The US dollar has not been able to sustainably break through its 200-week moving average for 11 consecutive trading days as traders await crucial macro data and the Federal Reserve’s rate decision this week. The first data patch in the form of the JOLTs report was ambiguous enough to not be market moving. US job openings rose more than expected in December, beating the 8.75 million estimate by a large margin as vacancies increased to 9.02 million. Positive sentiment surrounding the continued resilience of the labor market was dampened by other data points showing some cooling on the demand side. The number of Americans voluntarily quitting their jobs fell to just 3.4 million, reaching the lowest point in nearly three years.
This sets the stage for the next labor market data on Wednesday (ADP private employment) and Friday (non-farm payrolls). The recent macro news flow has been solid and with the US economy expanding with an above 3% growth rate last quarter, there will be less need for Fed officials to lean too much into the easing bets today. Markets are still pricing in five rate cuts for 2024, compared to the three cuts penciled in by the FOMC.
Still, the strong macro backdrop has moved markets a bit into the Fed’s direction 1) as the start of the expected policy easing cycle has been postponed by two months and 2) as investors have pared back their cutting expectation for 2024 from seven to five. Today’s FOMC meeting is set against a backdrop of a resilient economy. The Conference Board’s gauge of the current situation of US consumers rose to the highest level since March 2020, indicating a strong start to the year. Households have profited from falling inflation and equity markets at record highs.
The US dollar has enjoyed strong demand at the beginning of the year and has risen against 80% of its peers in January. This stands in stark contrast to how 2023 ended as the Greenback was up against 10% of currencies in December. However, the correlation between positive data surprised and the dollar has weakened, suggesting hesitancy from investors to push the Greenback much higher for now. The Fed decision and Treasury Refunding Announcement later today will be crucial impulse givers for the US dollar.
Mind the gap sterling
George Vessey – Lead FX Strategist
The first month of the year has been a broadly positive one for the pound as it has appreciated against almost 80% of 50 global currencies we’re tracking. Sterling has climbed over 1.5% against the euro to hit fresh 5-month highs, as investors pare back rate cut bets by the Bank of England (BoE) this year. However, sterling is struggling versus the USD, with investors turning cautious ahead of the Fed and BoE rate decisions and amidst rising geopolitical risks.
Although the 12- and 3-month correlation between GBP/USD and the S&P500 index remains a strong positive one, we have seen the 1-month correlation break down at the start of 2024. The currency pair continues to trade sideways in a tight trading range between, whilst the bellwether US equity index is up over 3% and has notched six record closing highs year-to-date amid expectations of interest rate cuts on the horizon. Will a correction lower in equities close this gap or will GBP/USD break out higher? On a daily timeframe, GBP/USD demonstrates a descending triangle chart pattern formation, which indicates a sharp volatility contraction but with an upside bias. But on the macro front, a slew of weak UK data yesterday has weighed on sterling.
The British Retail Consortium showed prices in UK shops rose at the slowest annual pace since May 2022 this month. UK consumer credit growth was the weakest in seven months and the annual growth rate for net mortgage lending was flat for the first time since the series began in March 1994. This increases the chance of a less hawkish BoE meeting tomorrow, which will be the next major trading point after today’s Fed decision.
European shares surge as Eurozone avoids recession
Ruta Prieskienyte – FX Strategist
European STOXX 50 reached a new 23-year high and the broader STOXX 600 climbed to a two-year peak, as investors evaluated Q4 GDP flash data for the Eurozone and considered its potential impact on the ECB’s policy outlook. Preliminary figures showed that the Eurozone economy unexpectedly avoided a technical recession in the last three months of 2023, following a 0.1% contraction in Q3, as better than expected growth in Spain and Italy salvaged the bloc’s performance just as French economy stalled and Germany contracted by 0.3%.
Last week, ECB President Lagarde emphasized that risks to economic growth were “tilted to the downside”. Recently, both Ifo and GfK Consumer Indicators unexpectedly worsened for the month of January and the latest Eurozone economic sentiment indicator also marginally weakened from December’s 7-month highs. Meanwhile, yesterday IMF downgraded their growth prospects for the Euro Area for 2024 (0.9% vs 1.2%). What does this mean for the ECB going forward? Well as long as the eurozone remains in de facto stagnation mode and does not slide into a more severe recession, there is little reason for the ECB to react to more sluggish growth with imminent rate cuts. With the job of bringing inflation back to target not done as of yet, the Bank should not look into possible rate cuts. It would require a severe recession or a sharp drop in longer-term inflation forecasts to clearly below 2% to see a rate cut before summer months.
In the light to barely better than expected GDP print, euro advanced by an average of 0.17% against most of its G10 peers, with the exception of Swedish Krona. EUR/SEK declined for the 8th consecutive day as improving growth prospects continue to favor the Scandi currency. Meanwhile, EUR/USD traded largely sideways, posting a barely there gain of 0.1%, as traders steer on the cautious side while awaiting the Fed’s monetary policy decision later today. EUR/GBP gained 0.2% d/d, but continues to trade close to 5-month lows as BoE rate decision looms tomorrow afternoon.
Canadian dollar falls ahead of FOMC
Ruta Prieskienyte – FX Strategist
Earlier on Tuesday, the Canadian dollar appreciated to a near 3-week high against the US dollar, but was unable to hold onto its four-day winning streak ahead of today’s FOMC meeting as US dollar was narrowly lifted by upbeat US job openings and consumer confidence data.
On the domestic front, investors keenly await the Canadian GDP growth figures due shortly this morning. Canada’s economy is expected to have grown by 0.1% m/m in November 2023 after three consecutive flat readings. We will also get a glimpse of December’s preliminary data, which is expected to come in flat once again. The Bank of Canada (BoC) said last week that economic growth in Canada has stalled since mid-2023 and is likely to remain around zero in the first quarter of 2024. Having said that, both the central bank and the IMF remain optimistic that soft landing remains the base case for the world’s 9th largest economy. According to the latest IMF forecasts, Canada’s economy is set to grow by 1.4% over the course of 2024 – the third-fastest pace among advanced peers, ranking behind the US and Spain. Nonetheless, as the domestic economy slows in the immediate term, BoC’s focus is shifting to when to cut borrowing costs rather than whether to hike rates again. Market are pricing in 97bps worth of cuts over the course of 2024, with the first 25bps cut expectations pushed back to June meeting with 82% probability.
USD/CAD recovered gained close to 0.2% d/d ahead of the Fed decision regaining position above $1.3400 handle. We expect the Canadian GDP growth numbers to be largely overshadowed by the FOMC policy meeting and press conference despite no change expected in the policy rate. Investors are unlikely to take any risks before scrutinising Powell’s speech for clues on the future policy rate trajectory. If Fed were to stick to its dovish rhetoric from the December meeting, we could see the Canadian dollar edge higher and retest the $1.34 barrier once again.
Key global risk events
Calendar: January 29 – February 02
Euro disappoints across board
Table: 7-day currency trends and trading ranges
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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.
