The Week Ahead –

Economic Table 

What’s Going On?

As highlighted throughout our reports so far this year the currency markets have been stuck in tight ranges, with the dominant theme being Dollar strength – which is in complete contrast to the end of 2023, when the Dollar was on the back foot. The root cause of this Dollar strength and lacklustre FX markets boils down to global central banks and the timing of interest rate cuts. The financial markets had nailed their colours to the mast in the final quarter of 2023, calling for a deterioration of US economic data and an interest rate cut by the Federal Reserve by March of 2024. Hence the market has positioned itself for a weaker Dollar, which saw the likes of EUR/USD and GBP/USD rally into year end. The market got this spectacularly wrong – US economic data has outperformed its peers since Jan 1st and the Federal Reserve in the US has categorically stated that they are not going to cut interest rates in March. This has led to a liquidation of positions build up into the end of 2023 and a complete reversal of the weaker Dollar trend in the currency markets.

It’s always a dangerous game when the financial market attempt to accurately predict the precise timing of interest rate cuts by central banks and it can lead to choppy, directionless markets in the lead up to it – unfortunately that is what we are now experiencing in the FX markets – with a bias of overall Dollar strength.

The other theme that has emerged this year so far is Sterling strength, particularly in the Sterling crosses – with the likes of GBP/EUR, GPB/CHF and GBP/JPY all trading towards the top of their 18 month range. GBP/EUR needs to break the 1.1765 or in EUR/GBP terms the 0.8500 level to garner further momentum for the Pound.

Levels in G10 to watch this week –

EUR/USD – 1.0900 remains the elusive topside level in EUR/USD – 1.0898 the high so far this month – back below 1.0750 and we should see further Euro weakness, Dollar strength.

EUR/GBP – It’s all about the 0.8500 support level in EUR/GBP – a break of here and we will see fresh 18 month lows and further Sterling strength. Back above 0.8650 and something significant has changed in these markets.

GBP/USD – Whilst the Pound has done well versus the majority of G10 currencies this year, it still struggles against the Dollar. 1.2800 is the topside level to break, which could see GBP/USD run towards 1.3000 level. Back below 1.2560-50 zone and we would begin to get worried regarding the Pound.

Week Ahead –

It’s a quiet start to the week; however things get a little busier in the latter half, which could bring some excitement to the currency markets.

The week kicks off on Wednesday with the Reserve Bank of New Zealand’s interest rate decision. We expect the RBNZ to leave rates on hold at 5.5% at its February 28th meeting even though the labour market data were stronger than expected. It has been on hold since it last hiked in May last year.

On Thursday/Friday we get Eurozone inflation figures – The Eurozone February flash inflation round begins with France, Spain and Germany. The Eurozone-wide estimate is released at 1000GMT/1100CET on Friday, with an early consensus looking for core inflation at 2.9% Y/Y (vs 3.3% prior) and headline at 2.5% Y/Y (vs 2.8% prior)

Again on Thursday we get the January PCE deflator from the US. This will be the last reading of the Fed’s preferred inflation gauge before its March interest rate decision meeting, so it will be eagerly watched by the markets.

Chart of the Day – Bitcoin – it’s worth highlighting that the Dollar is not strengthening against everything – with Bitcoin rallying over 112% since Oct of last year – see chart below.