Written by Convera’s Market Insights Team
Waiting on US CPI
Boris Kovacevic – Global Macro Strategist
The US dollar edged higher for a second straight day, mostly helped by gains versus the euro, pound and yen. Investors are bracing for the important US CPI report out tomorrow, which will most likely decide the Federal Reserve’s bias going into the January meeting. Economists see inflation moving slightly higher in December, rising from 3.1% to 3.2%. However, core inflation should have continued its decline at the end of last year and is expected to have cooled by 20 basis points to 3.8%.
Markets are going into the event pricing in six rate cuts worth 25 basis points for the whole of 2024 with March as the starting point of the policy easing cycle. Yesterday’s NFIB survey did little to nothing to change that view. Small US business optimism increased to the highest level in five months in December, rising from 90.6 to 91.9. Price and compensation expectations remained broadly unchanged and still point to an uptick in inflation and wage growth in the second quarter of this year.
US Treasury yields are down across the curve on the week. Equities have completely eared their early-year losses from last week with the S&P500 and Nasdaq up 1.5% and 2.2% respectively. We therefore have an interesting mix of falling yields, rising stocks and a stronger dollar this week. GBP/USD is treading water and is still struggling to maintain its position above $1.27. The currency pair has now been in and out this level for seven consecutive weeks now but has failed to convincingly break out.
German data continues to disappoint
Ruta Prieskienyte – FX Strategist
It was a very quiet day for the markets on Tuesday as investors preferred not to take risks ahead of key US CPI data Thursday. Global stocks fell and yields inched higher as mounting inflationary pressures across Europe prompted investors to temper their anticipation for forthcoming policy rate cuts. EUR/USD drifted lower to €1.0932 and traded within a tight band of €1.0909- €1.0966.
Yesterday’s euro performance was dampened by less than optimistic German data. Contraction in industrial production accelerated for a record sixth consecutive month in November by -0.7% m/m, missing market expectations of a 0.2% growth. The continued sharp drop in activity in the construction sector is especially worrying. For the year, industrial production was down by close 5% in 2023 and is more than 9% below pre-pandemic levels. Meanwhile, even though eurozone GDP was virtually stagnant over the year to the third quarter of 2023, the eurozone unemployment rate fell to a historic low of 6.4% in November. While the historically tight labour market will continue to support consumption, it complicates the matters for the European Central Bank (ECB) which is trying to gauge what impact continued tightness in the labour market will have on inflation. Several members of the Governing Council have stated that the ECB will first want to have a good view of the wage agreements in H1 of 2024 before it can kickstart policy easing.
EUR/USD remains within Friday’s daily range as investors await a new impetus to dictate the pair’s direction. With calendar light on the data front, we will be keeping an eye on speeches from ECB policy makers for fresh clues on ECB policy rate trajectory. With minor support at €1.0927 under pressure, weakness through here could see EUR/USD spot retest 100-day SMA at €1.0877.
Aussie falls on weaker inflation
Boris Kovacevic – Global Macro Strategist
Global FX markets were mostly cautious overnight ahead of key inflation data from Australia, US, and China over the next few days. The US dollar was higher while the Australian dollar fell ahead of this week’s key inflation data for both countries. Inflation in Australia fell more than expected, coming in at 4.3% and setting the lowest growth rate since January 2022. This will make further Reserve Bank of Australia rate hikes less likely and has weighed on the aussie. AUD/USD is currently following the overall momentum of the FX market, which has been favoring the dollar for two weeks now. The currency pair is down around 2.5% since reaching a multi-month high in the last week of 2023. At levels around $0.67, we are still trading mostly at the lower half of the pairs longer-term trading range.
Stocks enjoying some momentum
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.
