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DXY appreciated by 0.2% to 104.28 last week, closing above its 100-day moving average for the first week since mid-November. Fed officials are adhering to their forecast of three rate cuts in December’s Summary of Economic Projections. The US calendar is light in terms of data, focusing mainly on Fed events, especially the FOMC minutes on 21 February. Seven Fed officials are scheduled to speak on Wednesday-Friday. They are Vice Chair Philip Jefferson, Governors Michelle Bowman, Lisa Cook, and Christopher Waller, and Presidents Raphael Bostic (Atlanta), Patrick Harker (Chicago), and Neel Kashkari (Minneapolis). Unless they sound overly hawkish, Fed officials have already pushed back against the market’s aggressive rate cut bets. Since mid-December, interest rate futures have pulled back their stakes from seven to four cuts this year, and for the first reduction to start in June instead of March.
Hence, DXY did not push above 105 last week when the US 10Y bond yield was capped at around 4.33% or its 100-day moving average. Japanese officials also stepped up verbal intervention with USD/JPY above 150. On the other hand, the market is not rushing to dump the greenback ahead of possible surprises in next week’s PCE deflators. Moreover, the US economy has proven resilient compared to the technical recessions in Japan and the UK amid underwhelming growth in other economies. Meanwhile, China returns from its week-long Lunar New Year holidays. Investors are still holding out for more stimulus measures despite the skepticism over the Chinese economy.
EUR/USD remains pressured below 1.08. The European Central Bank is divided over whether to cut rates too soon or too late. ECB member Francois Villeroy de Galhau (France) preferred gradual cuts over waiting too long to cut rates. Eurozone GDP growth has been stuck in a ±0.1% QoQ sa range for five quarters into 4Q23. The European Commission downgraded this year’s GDP growth outlook to 0.8% from its autumn forecast of 1.2%. On the other hand, ECB President Christine Lagarde and member Isabel Schnabel (Germany) did not want to rush rate cuts for fear that inflation may rebound. With wages becoming an important driver of inflation, the ECB will wait for the Eurozone wage talks to conclude after the April meeting to determine if it could start cutting rates in summer. At 2.8% YoY and 3.3% in January, headline and core inflation were still too high above the 2% target.
GBP/USD is hemmed between 1.25 and 1.2650 this week with a downside bias. With the UK economy in a mild technical recession and the Tory Party losing two significant by-elections over the weekend, expect more pressure on the Bank of England to lower interest rates. Real GDP contracted by 0.4% QoQ sa in 4Q23 after declining 0.1% in 3Q23. However, retail sales turned positive by 3.4% MoM in January from its -3.3% growth in December, suggesting a short-lived downturn. Over the weekend, BOE Chief Economist Huw Pill wanted several months of data to be sure inflation was on its way to the 2% target before considering rate cuts. Although CPI inflation fell 0.6% MoM in January following a 0.4% rise in December, headline and core inflation were high in YoY terms, at 4% and 5.1% in December. Do not expect Chancellor of the Exchequer Jeremy Hunt to dole out generous tax cuts at the Budget announcement on 6 March. Hunt is constrained by the reduced fiscal headroom provided by the Office for Budget Responsibility (OBR) forecasts and the IMF pushing the UK towards the path of fiscal consolidation.
Quote of the day
”Men are not the enemy but the fellow victims. The real victim is women’s denigration of themselves.”
Betty Friedan
19 February in history
In 1963, American author and activist Betty Friedan published The Feminine Mystique, a landmark work that was a catalyst for the second-wave feminist movement.
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