January 22, 2024

“The pace and timing of the easing cycle continues to be the main concern for the currency markets this week, and a jam-packed calendar includes four major central bank decisions to warm markets up for GDP and core PCE data in the US on Thursday and Friday.”

Tim Hallinan – Trading Director

Main Headlines

Germany’s chemicals sector, the largest in Europe, is experiencing the impact of delayed shipments through the Red Sea, joining other industries in warning of supply disruptions. Essential Asian imports to Europe, including car parts, engineering equipment, chemicals, and toys, are facing extended delivery times. Container shippers are redirecting vessels around Africa, avoiding the Red Sea and the Suez Canal, following attacks by Yemen’s Houthis. Tesla’s Berlin factory has been one of the largest victims so far of reduced trade traffic.

UK Chancellor Jeremy Hunt stated that he plans to use the March budget, potentially his last before an expected national election, to enhance economic growth, with tax cuts being a part of the strategy. “My priority in the upcoming Spring Budget will be to build on our progress and go even further to drive economic growth,” Hunt wrote in a column in The Mail on Sunday. “Because if we can sustainably grow the economy, we can relieve the pressure on families and generate the revenue necessary to invest in the public services we all rely on.”

GBP

Sterling recovered its losses from disappointing retail sales data on Friday, powered by a risk-on rally amid gains in equities later in the afternoon. Hot inflation data continues to buoy the pound given broad expectations that the Bank of England will lag most developed markets central banks in policy easing. A dollar retracement from its December slide has sterling 0.3% down this month, but against the euro the pound has edged up by 1.2%. With little other domestic data, the PMIs on Wednesday headline the macroeconomic diary this week. This indicator has been particularly flattering for the UK recently, with British economic activity firmly within the realms of expansion – a slight easing is expected here, but the index should continue to trend above the critical 50 mark.

EUR

Thursday’s ECB decision looms for the euro after it slipped 0.5% last week. Given that ECB policymakers already had boundless opportunities to discuss the monetary policy outlook in Davos last week, it is unlikely that any new or unfamiliar rhetoric will further unsettle market expectations for cuts here. Indeed, a cut at the May meeting seems to be the furthest that traders are willing to be pushed back in terms of rate pricing, and ECB officials have already thrown much at tempering expectations. The PMIs on Wednesday are likely to hold more weight for markets, the consensus for which looks to a moderate improvement in economic activity that may support the narrative that keeps rates at current levels at least until the summer.

USD

Pared back rate cut expectations saw the dollar post a third successive weekly gain, having recovered almost 2% since December’s euphoric risk rally. Traders have finally caved on the March cut and have instead pencilled it in for May, with the probability priced into the money markets for March now below the 50% mark, driven by persistent resilience in the economic data and hawkish central bank rhetoric. The lowest inflation expectations since 2020 and a risk-on move dented some of this cheer late on Friday, however, despite a spike in consumer sentiment to its highest level since 2021. Some crucial headline US data lands in the second half of this week, beginning with the flash PMIs on Wednesday and followed by Q4 GDP growth on Thursday and core PCE on Friday. Cross-reads from PPI and CPI put core PCE down to 3.0%, and a moderation from Q3’s consumer binge should see GDP growth at a more reasonable 2.0%. Central bank meetings in Japan, Canada, and Norway should also keep volatility elevated.

Markets

European and US stock futures are on the rise, continuing the global equities rally that propelled the S&P 500 Index to a record high last Friday. The S&P 500 surpassed 4,800 last week, buoyed by gains in tech shares and optimism regarding anticipated interest-rate cuts by the Federal Reserve and the artificial intelligence boom. Nevertheless, Chinese stocks are diverging from this trend, facing additional losses due to pessimism surrounding the nation’s faltering economic recovery.

Main Economic Events

2:20am.: Chinese Loan Prime Rates
4:00pm.: US CB Leading Index
10:30pm.: New Zealand BusinessNZ Services Index

Corporate Events

Earnings include United Airlines

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