Written by Convera’s Market Insights team
A busy US data docket
George Vessey – Lead FX Strategist
Global stock markets stretched to fresh record highs last week, bonds were sold off and US yields touched fresh 3-month highs. FX has detached somewhat from rate spreads recently though as the US dollar index recorded its firstly weekly fall of 2024 as investors took a breather after reducing bets for future Federal Reserve (Fed) rate cuts. It’s all about inflation this week, as the dollar has started the new week on a firmer footing amid markets pricing in upside risk for the core US PCE reading.
Improved risk sentiment supported demand for global equities and high beta currencies last week, weighing on the USD, but the buck extended gains against the lower-yielding JPY and CHF. Given the dollar’s ongoing yield advantage, it’s unlikely we’ll see a big shift in sentiment away from the USD, but we’re already witnessing signs of exhaustion to the upside. The failure of the dollar index to hold above its 100-week moving average and pulling back sharply from the 105 level begs the question: have we already seen the top of the DXY for 2024? US dollar has been the clear outperformer so far this year as markets have repriced the outlook for global rate cuts and as the US economy continues to show resilience, but we think once the Fed starts cutting interest rates, the dollar will lose its shine. For more cues, investor’s attention is poised to return to a heavy economic calendar, alongside several speeches by Fed policymakers.
Key data points to monitor include PCE price indexes (the Fed’s preferred measure of inflation), on Thursday, where forecasts anticipate a 0.3% increase for January, a tick up from the 0.2% gain observed in December, while core prices are expected to rise at a faster pace of 0.4%. The ISM manufacturing PMI, durable goods orders, a second estimate of fourth-quarter GDP data, new and pending home sales and Case-Shiller home prices, will also be closely monitored throughout the week.
Pound buoyant with risk appetite
George Vessey – Lead FX Strategist
The risk-sensitive British pound was supported by global stock gains after AI darling Nvidia’s stunning results sparked a wave of record highs across equity markets. The pound’s weekly performance against the dollar was its best year-to-date, ending a 3-week slump prior. GBP/USD was supported by its 200-day moving average but once again failed to hold above the $1.27 handle. GBP/EUR snapped a 3-week losing streak and reclaimed €1.17 while GBP/JPY rose to its highest level since 2015. It’s a quiet week on the UK data docket this week so sterling is likely to driven by sentiment and external factors.
Sterling traders shrugged off weak UK consumer morale figures last Friday and hung onto the stronger-than-expected PMIs, which sent UK gilt yields marching higher – now up over 60 basis points since the start of the year. The high yielding pound cheered and has now appreciated against 70% of 57 global peers month-to-date, up from 40% at the start of February. Still, GBP/USD remains over a cent below its 5-year average of $1.28 and over 2% away from its post-Brexit (2016) average of $1.29. The currency pair is still trapped in narrow 2% trading range this year. Over the past ten years, the average monthly trading range was double this – at 4%. Even the median was 3.7%. Will volatility pick up? The worry for sterling is that markets are already pricing in less Bank of England (BoE) rate cuts compared to its major counterparts so there is little room for further hawkish repricing. Plus, positioning is a major headwind as speculative traders hold an overcrowded bet on the pound appreciating, which paradoxically increases downside risks.
Although unlikely to be massively market moving, in the UK this week, the focus will be on the CBI gauge for distributive trades (Monday), British Retail Consortium’s February shop price index (Tuesday), Nationwide housing prices (Thursday) as well as the final manufacturing PMI (Friday). We will hear from several BoE policymakers throughout the week too – for more clues about the UK’s monetary policy outlook.
Euro breaks out of a bearish weekly trend
Ruta Prieskienyte – FX Strategist
EUR/USD consolidated its gains to close the week above the $1.085 threshold, reaching a new peak since February 1st in what was the best weekly performance over the last 2 months. The euro continues to benefit from lower market expectations for ECB rate cuts as well as a renewed risk on sentiment thanks to the Nvidia-led equity rally.
Last week’s two key takeaways were: (1) wages growth in Eurozone remains elevated but is no longer accelerating and (2) the bloc is recovering from the economic slump although continues to lag peers. However, the divergence between Eurozone economies is widening. France experienced the best PMI in nine months, while Germany’s decline accelerated for a fourth successive month, deeper into contraction territory. Friday’s Ifo Business Climate indicator for Germany did improve slightly in February but remains little changed from a three-and-a-half-year low. Meanwhile, the ECB’s meeting minutes confirmed that the central bank is broadly pleased with the current inflationary progress but remains worried about historically strong wages growth and is not ready to declare victory in the war again inflation. With the Spring rate cut off the table, money markets are currently pricing in less than 35% chance of a rate cut in April and three rate cuts throughout the year. We think that there might be further fuel in the tank for the euro to run higher against the dollar as we see further hawkish repricing in ECB rate expectations.
Looking ahead, the agenda for today is light with the only domestic event of interest being the President Lagarde speech later today. Investors are embracing for an action packed back end of the week with top tier data from both sides of the Atlantic. EZ M3 money growth will be the focus for domestic investors on Tuesday, before turning attention to the consumer confidence and manufacturing PMIs due Wednesday and Friday respectively.
US 2-yield over 3% up on the week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: February 26 – March 1
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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.
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