Written by Convera’s Market Insights team
Check out our latest Converge Market Update Podcast where our Global Macro Strategist, Boris Kovacevic, breaks down this week’s most notable macroeconomic news.
Dollar weakness accelerates before jobs report
Boris Kovacevic – Global Macro Strategist
The US dollar has suffered its worst 2-day run since late December and is on track to record its worst week of 2024 amid a series of US macro disappointments and as Federal Reserve (Fed) Chair Jerome Powell sounded more confident about cutting interest rates in coming months. Market have added another 25-basis point rate cut to the markets Fed pricing for 2024 as a result, fueling an extension of the global risk rally. The US jobs report has induced a lot of volatility over the past two months, strengthening the USD, will today deliver more of the same?
A spree of downside data surprises, coupled with dovish Fed chatter this week, means the first of the Fed’s rate cut seems to be within sight. Attention shifts to the US non-farm payrolls report today and unless it comes in hotter than expected, dollar weakness could continue into next week. The US economy has added over 680 thousand jobs over the last two months. December and January both saw job growth of above 300 thousand, something not seen since the middle of 2021. The consensus for today sees the number coming down to 200 thousand for the month of February. While this would constitute a slowdown, it is still above the post-pandemic trend of 190 thousand and a solid distance away from the neutral rate needed to sustain real (population adjusted) employment growth. The recent soft data patch has signalled a cooling of the tight labour market with the employment components of the ISM manufacturing and services PMI falling further into negative territory. This was confirmed by consumer confidence data from the Conference Board showing the increased difficulty of finding a job. However, monthly changes in these indicators do not seem to strongly correlate with the actual NFP print and only suggest the medium-term trend of job growth.
As discussed, the US dollar has lost significant momentum in recent trading sessions and is only up against 12% of global currencies month-to-date. This is down from 43% in February and 73% in January. Cracks are starting to show in the US currency’s reign with the dollar index back below 103 for the first time since climbing above it mid-January.
Pound jumps to 10-week high
George Vessey – Lead FX Strategist
The British pound is on track for its best week of the year versus the US dollar, rising over 1% and trading back above the $1.28 handle for the first time in 10 weeks. The 200-week moving average, which GBP/USD has been below since July 2023, is the next upside target, located at $1.2852 at present. But all eyes are today’s US jobs report, which has sent GBP/USD tumbling around 1% on the day following the last two prints.
Sterling has decoupled from some of the more prominent coincident and leading indicators like yield differentials and equities, but we note that GBP/USD has retained a strong negative correlation with bond volatility. When volatility in the MOVE index, a gauge of expected volatility in the US bond market, falls, GBP/USD tends to move higher. Volatility overall has been suppressed across financial markets amid expectations that central banks will commence policy easing at some point this year. If we see a spike in cross-asset volatility, especially in bonds, driven by macro data further supporting the notion of rates staying higher for longer, this could at least limit the pound’s uplift in the short term.
That being said, with the Bank of England expected to cut interest rates less than its major peers over the next couple of years, and with UK economic activity improving, we still believe the path of least resistance is higher through 2024 for GBP/USD, assuming these assumptions hold true and absent any major geopolitical shocks. The next domestic test for the pound is next week’s UK jobs report with all eyes on wage growth developments.
Euro takes off, ECB June rate cut in play
Ruta Prieskienyte – FX Strategist
The euro reversed half of it’s January losses, surging to a 7-week high towards $1.0950 as traders digested the latest ECB monetary policy decision. As expected, the central bank voted to keep its rates unchanged and reinforced borrowing costs will remain elevated for as long as necessary. During the regular press conference, President Lagarde said policymakers have not discussed rate cuts at this meeting as they need more evidence inflation is moving to the 2% target.
The latest round of staff projections brought the expected downward revision to growth and inflation forecasts. The ECB staff now expect inflation to come in at 2.3% in 2024, 2.0% in 2025 and 1.9% in 2026, with underlying inflation at 2.1% in 2025 and 2.0% in 2026. Despite the downward revision, Lagarde stressed the risks to high domestic inflationary pressure remain, with two key threats as follows: (1) Services inflation remains too high, stuck at about 4% and only dropping a touch in February; (2) Policymakers want assurance that wage increases are under control, data on which won’t be available until the end of Q1. June will be the point where enough data points will be available, either confirming that inflation has really been tamed or pointing to renewed upward pressure on prices. Interest-rate traders are positioning for a Q2 rate cut with 100bps of cuts by year-end, compared with some 92bps before today’s rate decision.
For now, EUR/USD faces a psychological resistance barrier at $1.0950 as the pair is fast approaching overbought conditions in the daily chart, with the RSI close to peaking around 70. Today’s key risk for the pair is US NFPs print. Should data indicate jobs and wages are softening, US yields may extend their recent slide and the dollar’s yield advantage over the euro may dwindle further as German-US spreads could extend their recent tightening. If it were to materialize, EUR/USD could test 2024 highs above $1.10. Alternatively, an upward surprise could drag EUR/USD below $1.09, erasing wiping out recent gains.
Pound and euro surge over 1% to multi-month highs
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: March 4-8
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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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