Written by Convera’s Market Insights team
Dollar bounces off key support
George Vessey – Lead FX Strategist
The US dollar index (DXY) has found some decent support around its 200-day moving average, currently located at 1.03.73 and is trading back above the 104 mark today as traders await the Federal Reserve’s (Fed) preferred measure of inflation on Thursday for clues on when the central bank may start cutting interest rates. Global stocks were mixed yesterday with the Dow Jones slipping, the S&P500 flatlining and the Nasdaq gaining, while yields rose slightly across the curve.
Investors largely brushed off data from the US showing durable goods fell 6.1% last month, exceeding the 4.5% consensus forecast and marking the most substantial monthly decline in durable goods orders since April 2020. US new home sales rose less than expected despite a batch of downward revisions in earlier months but the S&P CoreLogic Case-Shiller 20-city home price index in the US went up 6.1% y/y in December 2023, the most since November 2022. There remains a sense of stability across markets at present, particularly now that market expectations are more closely aligned with the Fed’s latest projections and comments. Therefore, unless we see a big trend break in tier one data, volatility may remain subdued. With most Fed officials uniting around a cautious and slow approach to cutting interest rates, and data coming in mostly more robust than expected, markets have largely priced out a rate cut at both the Fed’s March and May meeting and the chance of a cut in June sits around 50%.
The global inflation outbreak and rate hiking was mostly synchronized on the way up, but the rate cutting campaign may be less so, and sufficient policy divergence could trigger more volatility across financial markets – especially in the FX world. And, since the dollar is still historically overvalued with the DXY more than one standard deviation above 20-year averages, we’re still in the camp of dollar weakness to unravel throughout the year.
Short-term GBP risks mount
George Vessey – Lead FX Strategist
Yesterday saw the pound end its longest daily winning streak against the US dollar since October last year. Back then, GBP/USD fell around 2% in the two weeks that followed. Amidst this period of low volatility and with sterling’s attractive yield appeal, a similar sized correction seems unlikely, though not impossible given the upcoming risk events – US inflation data this Thursday and the UK Budget next week.
Analysing the one-year rolling correlation between monthly percentage changes of G10 currencies versus the US dollar and the MSCI global stock index, highlights the pound as the most risk-sensitive of the majors. So, when global risk appetite is robust, with equities notching fresh record highs as they are now, the pound has naturally been supported too. This positive correlation between GBP/USD and global stocks has weakened in February though, likely because of rising US yields and strong US economic data keeping dollar demand buoyant too. We still forecast the pound to recover towards $1.30 through 2024, helped by falling inflation powering a consumer-led recovery in UK GDP growth and by the Bank of England keeping interest rates higher for longer than its major counterparts. However, the short-term outlook appears more dependent on US data and when the Fed decides to start cutting rates, and by extension the global rate cutting cycle commences.
It’s difficult to be overly bullish on GBP/USD whilst the US economy remains so strong, and the Fed continues to pushback on easing bets. Therefore, unless we see a big data surprise or UK Chancellor Jemery Hunt catches markets off guard, the narrow 2% range for GBP/USD might persists for a while longer.
Financial conditions tighten across Eurozone
Ruta Prieskienyte – FX Strategist
The euro traded largely sideways against the US dollar as the Greenback benefited from a cautious market mood amid the mixed macroeconomic data releases from the US. EUR/USD gained early in the session on the back of a better than expected GfK print, but was not able to hang onto the early gains and ultimately closed the day largely unchanged.
According to the GfK Consumer Climate Indicator, German consumer morale improved slightly heading into March from February’s 11-month low. However, the headline index has remained below its long-term average for a record of 28 consecutive prints – the longest pessimistic streak. Income expectations hit their highest since February 2022, while the propensity to buy and economic prospects were little changed. Meantime, the propensity to save climbed to its highest since June 2008. This trend extends to the wider bloc, as data indicated that Eurozone bank lending growth slowed to a near 9-year low, further underscoring the significant deceleration in the bloc’s economy due to the European Central Bank’s unprecedented tightening measures implemented over the past months. The overall private sector credit growth, encompassing both households and non-financial corporations, stood at 0.4%, unchanged from the previous month.
EUR/HUF gained over 0.6% on the day and climbed to a 5-month high as the National Bank of Hungary (NBH) cut its base rate by 100 basis points to 9% on Tuesday, as expected, ramping up the pace of rate cuts after weaker-than-expected growth and benign inflation data since its January meeting. The euro remained broadly unchanged across most G10 pairs, appreciating marginally only against the Canadian dollar and the Swedish Krona. Looking ahead, investors will be keeping an eye on today’s EZ sentiment data for further evidence of a Eurozone recovery.
GBP/USD drops into lower half of short-term range
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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