Written by Convera’s Market Insights Team
Dollar up against all G10 currencies
Boris Kovacevic – Global Macro Strategist
The ongoing back-and-forth in FX markets continued in yesterday’s trading as a key US Federal Reserve official tried to push back on elevated expectations for seven Fed rate cuts in 2024. Fed governor Christopher Waller – seen as closely aligned to Fed chair Jerome Powell – said that while official interest rates were likely near a peak, markets should not expect a sharp drop in the Fed funds rate.
Waller’s comments pushed down expectations of a March cut to 60% and lifted the US dollar to a one-month high. The Greenback is on track to appreciate against every G10 currency this week as somewhat of a risk-off sentiment has been created in recent days, making it difficult for equities and risk sensitive assets to advance. The pushback of both European and US policy makers against rates cuts and weak Chinese data have curbed global enthusiasm. On the data front, the New York Empire State Manufacturing Index fell to the lowest level since May 2020, dropping from -14.5 to -43.7. Manufacturing activity in the New York state recorded its second largest two-month decline on record as the sub-categories unfilled orders, new orders and shipments deteriorated. The data point had been mainly ignored by markets but does seem to suggest that leading economic indicators continue to point to a downside risk for GDP in 2024. The US dollar focused on falling Fed rate cutting bets and pushed through key resistance levels against most currency pairs.
The equity sell-off in Asia continued following disappointing macro data out of China. The second largest economy in the world expanded by 5.2% in the last quarter of 2023, slower than the 5.3% economists had expected. This comes at a time when retail sales increased by the least in three months and the unemployment rate rose to a four-month high. Chinas population fell for the second consecutive year in 2023, adding demographics to the structural problems of the economy.
Hawks not able to support the euro
Ruta Prieskienyte – FX Strategist
As European stock and bond markets corrected to the downside, and euro slipped to a 1-month low against the US dollar on the back of general dollar strength as investors scaled back bets on Fed rate cuts. The German 10-year Bund yield climbed to 2.2% as markets processed a coordinated push-back from European Central Bank (ECB) officials. ECB hawks Nagel and Holzmann indicated that it was too early to discuss interest rate cuts, while other ECB officials, perceived as doves, including Lane and Herodotou, suggested that current market expectations for rate cuts were overly optimistic. Meanwhile, French counterpart Villeroy stated that the central bank should exercise patience, but its next move would likely be a rate cut in 2024. Despite the messaging, investors continue to bet on around 150 basis points of ECB rate cuts by year-end.
On the data front, German investor morale improved for the third consecutive month, surpassing expectations. The ZEW economic sentiment indicator climbed to an 11-month high in January, signalling an optimistic shift in economic expectations for Europe’s largest economy. The indicator for the Euro Area edged down, but still exceeded market forecasts. 85.5% of surveyed analysts expected stable or improving conditions. Expectations for inflation, short- and long-term interest rates also seem to have reached turning points. ECB Consumer Expectations Survey revealed that median consumer expectations for Euro Area inflation over the next 12 months dipped to 3.2% in November 2023, marking the lowest rate since February 2022. Simultaneously, expectations for inflation three years ahead decreased to 2.2% from 2.5%, also hitting its lowest level since early 2022.
EUR/USD is stuck in a bearish streak for the past four trading days – the worst daily performance streak in 6-weeks. As signals have emerged highlighting downside risks, EUR/USD longs are looking for help from the Fed to negate the bearish influences in place. The pair has 200-day SMA at $1.0846 for support, but if the level is breached could see testing mid-$1.0700s.
CPI dampens the pounds fall
Boris Kovacevic – Global Macro Strategist
The British pound had recorded its worst day in two weeks yesterday, following the bout of USD strength and weaker than expected nominal wage data. Both developments led sterling to fall below the two supporting trend lines established in November and October last year. However, today’s surprisingly resilient inflation data has helped GBP/USD stay above the 50-day moving average at $1.26, which cable just briefly touched before the CPI release. The currency pair is now trading at around $1.2630 as the pounds strength against non-dollar pairs continues. GBP/AUD is on track to record the 10th appreciate in eleven days, having risen by 3.5% in this timespan. Sterling’s gains against the aussie are only topped by its outperformance versus the yen, against which the British currency has risen by 4.3% since the 3rd of January.
Focusing in on the CPI print, inflation rose for the first time in ten months in December, ending a streak of continued disinflation in the United Kingdom. Consumer prices increased by 10 basis points on a year-over-year basis to 4% with the core inflation rate remaining elevated at 5.1%. The closely watched services inflation picked up from 6.2% to 6.4%, completing the trifecta of strong inflation prints. While the rise in price pressures in December is not ideal, base effects have been mostly responsible for the upside beat. We continue to see inflation trending down over the coming months, supporting the thesis of the Bank of England starting to ease monetary policy starting from May onwards.
CAD weakens, but outperforms other G10
Ruta Prieskienyte – FX Strategist
The Canadian dollar fell to a fresh 1-month low against the US dollar as falling Fed rate cut expectations in a March meeting continue to benefit the Greenback. Despite that, Loonie managed to outperform other G10 as the decline was less (-0.5%) than for all other G10 currencies (-0.7% – -1.3%) supported by domestic inflation data.
On that front, the annual inflation rate in Canada rose to 3.4% in December of 2023 from 3.1% in the previous month, aligned with market expectations. The result was also consistent with the BoC’s signal that headline inflation is expected to remain stubbornly elevated, close to the 3.5% mark through the middle of next year. The acceleration in consumer prices was attributed mainly to a rebound in gasoline costs (1.4% vs -7.7% in November) due to waning base effects, which subsequently drove up the transportation costs component of the index too. Inflation also picked up for shelter as high mortgage rates continue to discourage home ownership and lifted rent prices instead. On monthly basis, consumer prices declined by 0.3% compared to November, which was also widely expected and aligns with the seasonal December drops observed in Canadian CPI. Subsequently, an uptick in domestic inflation data saw Canadian bond yields increase across the curve as markets reduced expectations for an early interest rate cut by the BoC. The probability of a rate cut in April fell to 66% as of this morning, down from 80% yesterday. Markets have also pulled back on cumulative rate cut speculations for 2024, pricing in 116bps (-9bps d/d) worth of easing by year-end.
USD/CAD breached past the 50-day SMA resistance level and continues to appreciate in the morning European trading session. The pair faces a strong resistance level at 200-day SMA situated around $1.3566 and momentum indicators such as the Relative Strength Index (RSI) are approaching an overbought territory. Therefore, we expect the bullish momentum to soon run out of steam.
Key global risk events
Calendar: January 15 – 19
US dollar dominates the week
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.
