Will the US Dollar rollercoaster continue?
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Will the Pound Weaken on Softer UK Labour and GDP Data?
Last week the GBP/EUR weakened due to softer-than-expected Q4 GDP data. The latest preliminary Q4 Gross Domestic Product (GDP) data from the United Kingdom Office for National Statistics (ONS) showed that the economy shrank by 0.3% in the last quarter of 2023. Investors expected a growth of 0.1%. In the July-September quarter, the UK economy shrank by 0.1%. With two consecutive quarters of economic contraction, the UK economy has officially fallen into a technical recession.
This has increased expectations of an early rate cut by the Bank of England (BoE), as keeping interest rates at their current level could weaken the economic outlook. Additionally, lower-than-expected inflation data for January has also increased expectations for earlier rate cuts.
However, the Bank of England (BoE) is expected to remain hawkish and its different monetary policy from that of the European Central Bank (ECB) may support the GBP. Despite, the weak data, markets don’t expect the BoE to cut rates soon, and the consensus is that the total easing will be around 75 bps and 100 bps in 2024. As long as the divergence between the BoE and ECB continues, the pound’s losses will be limited.
On the Eurozone front, the euro strengthened despite European Central Bank (ECB) President Christine Lagarde’s comments that upcoming monetary policy meetings will remain data dependent. She added that the disinflation process is ongoing, and inflation is expected to come down significantly this year. ECB executive board member Isabel Schnabel said on Friday, “we must be cautious not to adjust policy stance prematurely. Monetary policy needs to remain restrictive until we can be confident that inflation will sustainably return to our medium-term target.” Markets expect the first rate cut in June by the ECB, with an expected 125 bp of total easing within the next year, down from the 150 bp predicted. If investors see less easing, the euro could strengthen and push the pair lower.
In terms of economic data, we note the following: On Monday, we note the release of February’s Rightmove house prices index from the UK. On Thursday, we get CPI inflation data for January for the Eurozone, and also on Thursday we get flash PMI data from France, Germany, the Eurozone and the UK. On Friday, we note Germany’s February IFO business climate index and February’s consumer confidence index for the UK.
Expected Volatility – Medium
UK and Eurozone manufacturing and services PMI on Thursday will be key.
US Initial Jobless Claims may boost the dollare the USD?
The GBP/USD pair remained subdued on Friday. The upbeat UK Retail Sales data failed to boost the pound as investors remain concerned about the disappointing UK growth numbers for Q4, which showed the UK economy entered a technical recession.
The latest data released from the UK National Statistics showed that the Retail Sales were up 3.4% MoM in January from the previous 3.3% decline, better than the expected 1.5%. On an annual basis, Retail Sales rose by 0.7% YoY in January from a 2.4% drop previously.
The UK Gross Domestic Product (GDP) figures for the fourth quarter indicated that the UK economy dropped into a technical recession in the second half of 2023. The GDP growth numbers could pressure the Bank of England (BoE) to cut rates as early as May. However, central bank policymakers may want to see more evidence that inflation will drop closer to the bank’s target rather than rise again before they are convinced it is time to reduce interest rates.
In the US, softer January Retail Sales increased the likelihood the Federal Reserve (Fed) will cut interest rates sooner and weighed on the greenback. US Retail Sales dropped 0.8% MoM in January from a 0.4% increase in December, lower than the estimated 0.1% decline. Retail Sales Control Group came in at -0.4% MoM, lower than the previous reading of 0.6%.
In terms of US economic data, we note the following: US Fed minutes on Thursday, February flash PMI data due out also on Thursday and initial jobless claims ending 16 Feb. to be released on Friday..
Expected Volatility – Medium
On Thursday, the FOMC meeting minutes and the US S&P Global manufacturing and services PMI will be closely watched. Analysts will examine the minutes for insights into the Fed’s potential timing for rate reductions. The US PMI numbers from S&P Global are expected to show lukewarm economic growth and waning cost pressures, which may be encouraging for a soft landing of the economy and upcoming rate cuts, priced in in the June meeting. The manufacturing sector is expected to ease to 50.1 from the previous 50.7, while the services sector PMI may drop to 52.0 from the previous 52.5.
Will Eurozone manufacturing and services PMI improve?
EUR/USD weakened on Friday after two days of gains, due to market optimism for the USD despite disappointing US Retail Sales data. The EUR/USD pair dropped lower as better US yields pushed the greenback higher against the EUR. The US Dollar Index (DXY) found support on the expectation that the Fed will avoid rate cuts in March and May. FedWatch Tool shows a 52% probability of a 25 bps rate cut in June. Despite the release of weaker US Retail Sales data, the reduced Initial Jobless Claims provided some support to the dollar.
US Retail Sales dropped by 0.8% month-over-month in January, despite an anticipated decline of 0.1% against the previous 0.4% increase. US Initial Jobless Claims reported 212,000 unemployment claims for the week ending on the 9th of February, beating expectations of 220,000. On Friday, after the release of the US Producer Price Index, the US dollar jumped higher. Monthly Headline PPI moved from -0.1% to 0.3%. Yearly Headline PPI is seen going from 1.0% to 0.9%. Monthly Core PPI reached higher from -0.1% to 0.5%. Yearly Core PPI is seen moving from 1.7% to 2%.
Federal Reserve Bank of Atlanta President Raphael W. Bostic expects inflation to drop further, but if it falls faster, Bostic said he may review his position on the interest rates outlook.
From the Eurozone, Gross Domestic Product (GDP) data for the fourth quarter remained the same, but the ECB’s forward-looking wage tracker suggest strong wage pressures.
President of the European Central Bank (ECB), Christine Lagarde, commented that recent data demonstrates a continued slowdown in economic activity in the near term. Lagarde highlighted the significance of achieving the ECB’s 2% inflation target and the persistent disinflationary trend.
Expected Volatility – Medium
On Thursday, Eurozone PMI figures are expected to show that economic conditions in the Eurozone have continued to improve. Manufacturing PMI is anticipated to rise to 47.0 from previous 46.6. Services PMI is expected to show a smaller contraction as well at 48.7 versus 48.4. The subdued economic conditions may help the disinflation process, and boost optimism.
US initial jobless claims could also move the pair, and if the numbers show that the market remains strong then the USD will strengthen.
Indonesian Rupiah (IDR)
The latest vote polling results in Indonesia show current Defence Minister Prabowo Subianto has won the 2024 presidential election, avoiding election uncertainty. Following the election result, economists at MUFG Bank remain cautious. While Prabowo won the presidential election in the first round, there are potential political transition risks arising from a governing coalition and the appointment of key cabinet members.
In terms of data, Indonesia’s latest trade report showed that exports dropped more than anticipated while imports increased slightly for January. Exports dropped 8.1% year-on-year more than the forecast 3.2% contraction. A 24.6% YoY drop in oil product exports weighed on outbound shipments. Non-oil and gas exports dropped by 8.2% YoY. Imports increased by 0.4% YoY less than the forecast of 1.8% YoY, with non-oil imports rising 1.8% YoY.
While Indonesia’s trade balance remains in a positive surplus, its declining size could weigh on the IDR in the near term. The fact that the IDR is unable to gain support from the trade surplus suggests that Bank Indonesia may have to maintain policy rates at current levels to boost the IDR in the near term. This is why on Wednesday, Bank Indonesia (BI) rate decision will be of significance. The central bank is expected to keep rates unchanged at 6%, with Governor Perry Warjiyo remaining cautious of a potential increase in inflation in the first half of the year. Warjiyo said he will have room to cut rates in the second half of the year.
Australian Dollar (AUD)
On Tuesday, we get the Reserve Bank of Australia’s (RBA) meeting minutes. In its February meeting, the RBA kept the official cash rate at 4.35% as was widely expected. The Bank noted that higher interest rates have pushed down inflation and created a supply-demand stability. The RBA emphasised its data-driven approach and risk assessment but noted that a further increase in rates cannot be ruled out. Analysts will closely analyse the minutes for insights into the RBA Board’s discussions in February and any indications towards a change to a more neutral policy outlook.
Canadian Dollar (CAD)
The drop in Crude oil prices has pushed the Canadian dollar lower, given that Canada is the biggest oil exporter to the biggest Crude oil consumer the United States (US). West Texas Intermediate (WTI) oil price fell after an unexpected increase in US Crude Oil Stockpiles, which has increased worries about the demand outlook in the US.
Seasonally adjusted Housing Starts (YoY) came in at 223.6K in January, against the consensus of 235K and the previous reading of 248.9K. Manufacturing sales dropped by 0.7% month-over-month in December, and lower than the previous increase of 1.5%.
On Tuesday, we note the release of January’s consumer price index (CPI) inflation rate data. The data will likely show inflation hovering above 3%. This may not trigger a BoC policy rate cut, but we the bank may start easing by the June policy meeting.