An overview of the global market

[Zforex]

Dollar Strengthens, Mixed Market Movements Amid Rate Cut Speculations

On Tuesday, the dollar strengthened as investors reduced their expectations for imminent interest rate cuts by the US Federal Reserve. The probability of a 25-basis point reduction in March by the Fed is now assessed at 66%, down from 77% the previous day and 63% a week earlier. Attention is focused on upcoming remarks from the Federal Reserve's Christopher Waller, whose dovish stance in late November was a catalyst for a significant market rally at the year's end. Waller is scheduled to speak later on Tuesday.
In Germany, the Federal Statistical Office (Destatis) reported that December's Harmonized Index of Consumer Prices (HICP) remained steady at 3.8% year-over-year, aligning with market forecasts. The monthly HICP rate was also stable at 0.2%. Additionally, the headline Consumer Price Index (CPI) in December increased by 0.1% month-over-month and 3.7% year-over-year. The European Central Bank’s (ECB) chief economist, Philip Lane, indicated on Saturday that key data expected by June will guide decisions on a series of anticipated interest rate cuts. However, he cautioned against reducing rates too hastily. Despite ECB's Joachim Nagel's warning on Monday against premature rate cuts due to high inflation, markets anticipate the ECB to lower rates from record highs, potentially starting in March. Upcoming Zew Survey results from Germany and the Eurozone are also awaited.
The British Pound fell sharply in Europe on Tuesday morning after the UK Office for National Statistics (ONS) reported a sharp fall in average earnings for the three months to November. Despite difficult economic conditions at home and abroad, the UK labor market proved resilient. The wage growth, which fell short of the projected figures, is likely to strengthen the anticipation of an interest rate cut by the Bank of England (BoE) in the near future. The UK economy is facing a potential technical recession after the ONS reported a contraction for the third quarter of 2023 and the BoE expects limited growth in the final quarter of 2023 amid high interest rates and a worsening cost of living crisis. A weaker inflation outlook combined with fears of further economic difficulties could prompt BoE policymakers to reconsider their tight interest rate policy.
Bank of Japan (BoJ) Governor Kazuo Ueda emphasized the necessity to continue the ultra-loose monetary policy, awaiting more data to ascertain if inflation will persist. He stated that the negative interest rate policy would be abandoned once there is sufficient confidence in achieving sustainable 2% inflation.
Gold prices fell below $2,050 an ounce on Tuesday, breaking a three-day rising streak as the dollar and Treasury yields climbed. This movement occurred as investors dialed back their expectations for early interest rate cuts from the US Federal Reserve.
Oil prices displayed mixed trends on Tuesday. After experiencing losses in the previous session, concerns about the broader economy overshadowed ongoing tensions in the Middle East that have caused more tanker diversions.

 

[Zforex]

Mixed Economic Indicators Influence Currency, Gold, and Oil Markets

The dollar index maintained a one-month high on Wednesday, influenced by Federal Reserve Governor Christopher Waller's comments which reduced expectations of a March rate cut. Waller noted that the U.S. is nearing the Fed's 2% inflation goal, but cautioned against premature rate cuts until sustained lower inflation is evident. As a result, the likelihood of a rate cut in March decreased from 76.9% to 62.2% according to market expectations.
In Germany, economic confidence unexpectedly rose in January. The ZEW Indicator of Economic Sentiment increased to 15.2, exceeding expectations and the previous month's 12.8. However, the current situation index fell slightly to -77.3, below the forecast of -77.0. Eurozone confidence also saw a marginal decline in January, with the ZEW figure at 22.7, still above the estimated 21.9. Despite a rise in inflation, the European Central Bank (ECB) has not altered its monetary policy stance. ECB officials acknowledged uncertainties over future interest rates and inflation, with talks of rate cuts starting in spring. ECB Chief Mario Centeno emphasized that rate cuts should be considered, keeping all options open.
The UK's Consumer Price Index (CPI) increased to 4.0% year-over-year in December, surpassing the previous 3.9% and exceeding expectations. The Core CPI remained steady at 5.1% YoY. Monthly, the headline CPI rose by 0.4% in December, higher than the anticipated 0.2% increase.
In Japan, expectations have emerged that the Bank of Japan (BoJ) might delay shifting from its extremely dovish policy due to a recent devastating earthquake, lower inflation rates in Tokyo, and weak wage data, all of which continue to affect the Japanese Yen.
Gold prices dropped on Wednesday due to a stronger U.S. dollar, supported by comments from a Federal Reserve official indicating a reduced likelihood of an interest rate cut in March. Investors are waiting for further comments from Fed representatives.
As oil prices dropped on Wednesday, China, the world's second-largest oil consumer, reported economic growth slightly below expectations, raising concerns about future demand. Additionally, the strength of the U.S. dollar curbed investor risk appetite.

 

[Zforex]

Dollar Soars, ECB and BoE Monitor Policies, Gold Stays Near Lows
On Thursday, the US dollar neared a one-month high against major currencies, supported by strong US retail sales data and diminishing expectations of an early Federal Reserve interest rate cut. The likelihood of a Fed rate reduction by March has decreased to 61% from 65.1% on Tuesday, as per CME's FedWatch Tool. The dollar's strength is attributed to robust macroeconomic data and increased demand for the currency amid global geopolitical instability.
In Europe, ECB Governing Council member Bostjan Vasle suggested that it is premature to anticipate rate cuts in the early second quarter. He emphasized that the Eurozone's inflation remains above the 2% target, necessitating continued firm monetary policy. Market focus is on the ECB Monetary Policy Meeting Accounts and President Lagarde's upcoming speech, along with the December German Producer Price Index (PPI) data due on Friday.
The UK's inflation has remained persistently high, driven by factors such as increased fuel prices and service inflation, along with higher seasonal airfares. This situation has kept Bank of England (BoE) policymakers observant, especially with the UK economy's fragile outlook and significant price pressures. The upcoming December Retail Sales data, set for release on Friday, will be important for the Pound Sterling, with strong consumer spending potentially reducing prospects of an early BoE rate cut.
In Japan, the Yen has seen some demand but remains subdued in anticipation that the Bank of Japan (BoJ) will maintain its ultra-dovish stance in its January 22-23 meeting. Despite speculation about the BoJ potentially ending negative interest rates in April, the transition towards less accommodative monetary policy is expected to be gradual.
Gold prices have remained near five-week lows, influenced by hawkish statements from Federal Reserve officials and strong economic data, which have lowered expectations for substantial US interest rate cuts this year. The strengthening dollar has also made gold more expensive for holders of other currencies.
WTI crude futures have risen above $73 a barrel, fueled by escalating tensions in the Middle East. The US has conducted strikes in Yemen, and Pakistan has responded to Iranian strikes with military action. Despite an unexpected increase in US crude inventories, global oil demand is projected to rise significantly by 2025, as reported by OPEC and with the International Energy Agency's monthly report due for release today.

 

[Zforex]

Global Markets Brace for Central Bank Decisions with Mixed Economic Signals

The U.S. dollar stabilized on Monday, with the market's anticipation of rate cuts by the Federal Reserve put on hold due to recent economic data indicating sustained U.S. economic activity despite high-interest rates. Expectations had been for rate cuts to commence in March; however, interest rate futures now suggest a shift to May for the onset of reductions. This adjustment follows the release of data last week and has been accompanied by a rise in longer-term Treasury yields, with a notable 30 basis point increase in 10-year yields this month.
This week is poised to be eventful for financial markets, with the European Central Bank (ECB), as well as central banks in Canada and Turkey, scheduled to hold policy meetings on Thursday. These meetings coincide with an active earnings season and disruptions in the Red Sea affecting global trade. Ahead of the ECB meeting, the consensus among policymakers has gradually shifted to acknowledging an impending rate cut, although later and smaller than market expectations. Analysts are skeptical of the ECB's inflation projections and anticipate up to five rate cuts within the year.
In the UK, the Bank of England (BoE) is grappling with the challenge of high inflation and the threat of a recession, complicating its ability to maintain a tight monetary policy. This comes as the UK Office for National Statistics (ONS) reveals an unexpected 2.4% year-on-year drop in Retail Sales, contrary to the 1.1% growth anticipated by investors. The ONS notes an unusually early start to Christmas shopping and a significant decline in food store sales, signaling a worsening cost-of-living crisis influenced by elevated interest rates and persistent inflation.
In Japan, the Yen has struggled to capitalize on slight intraday gains due to expectations that the Bank of Japan (BoJ) will maintain its ultra-loose monetary policy at Tuesday's meeting. Factors such as the recent earthquake on New Year's Day and slight wage growth data support the view that the BoJ will not soon depart from its long-standing accommodative stance.
Gold prices dipped on Monday as the market reassessed the likelihood of swift interest rate cuts. Additionally, more positive risk sentiment in anticipation of upcoming U.S. economic data and central bank meetings this week has lessened the appeal of the metal as a safe haven.
Oil prices continued their decline on Monday, as concerns over economic growth dampened the demand outlook for crude. This bearish sentiment persisted despite geopolitical tensions in the Middle East and an attack on a Russian fuel export terminal, highlighting the complex dynamics at play in the energy markets.

 

[Zforex]

Assessing the Impact of Central Bank Policies and Economic Indicators on Currency Dynamics

The US dollar is slightly lower today, moving away from the previous optimism about a March rate cut, and is now being more conservatively valued. The dollar's trajectory is expected to be influenced by key data releases tomorrow, including the PMI, growth rate, and the Personal Consumption Expenditures (PCE) index, which is a measure of inflation. The last PCE reading indicated a rebound in inflation. The market's focus is also on the Federal Reserve's meeting at the end of the month, with ongoing uncertainty likely to persist until more definitive information emerges.
On the European front, the European Central Bank (ECB) is expected to maintain its benchmark policy rate at its Thursday meeting. ECB President Lagarde hinted at the World Economic Forum in Davos that the first rate cut might occur in the summer of 2024. Markets are anticipating the first ECB policy rate cut in April, with a total reduction of 135 basis points (bps) expected by the end of 2024.
The Bank of England (BoE) is forecasted to retain its current restrictive policy stance in its forthcoming meeting. A Reuters poll of economists predicts the BoE will maintain the policy rate at 5.25% in February. These expectations for unchanged monetary policy are supporting the Pound Sterling (GBP), which is positively impacting the GBP/USD pair. However, the recent decline in UK Retail Sales for December indicates significant economic challenges and rising price pressures, heightening concerns about a potential technical recession in the UK. This creates a challenging scenario for the BoE as it navigates its policy decisions.
The Japanese Yen (JPY) weakened slightly against the US dollar following the Bank of Japan's (BoJ) decision to maintain its ultra-loose monetary policy. However, market reactions suggest a belief that the BoJ will exit its negative interest rate policy between March and April. The BoJ's policy statement noted an increasing likelihood of achieving their price stability target, which supports the Yen.
Gold prices increased on Tuesday, recovering from previous losses as the dollar softened and investors evaluated the global monetary policy landscape.
Oil prices are rising in response to recent attacks by the US and UK against Houthi sites in Yemen and Ukraine's drone attack on a Russian fuel terminal in the Baltic Sea.

 

[Zforex]

Dollar Maintains Steady Position Near Six-Week Peak, Eyes on ECB and BoE Policies

On Thursday, the dollar maintained a steady position, close to a six-week peak, as investors waited for key economic data, including the first reading of the US Gross Domestic Product (GDP) for the fourth quarter which is expected to reveal a 2% annualized growth. Recent data showed powerful US business activity in January, with expansions in both services and manufacturing sectors.
Attention is also focused on the European Central Bank (ECB), with markets predicting it will maintain its current high interest rates at its January meeting. ECB President Lagarde hinted at a potential rate cut during the summer of 2024, highlighting a data-dependent approach. The market currently estimates a 60% likelihood of an initial rate reduction as soon as April.
The Bank of England (BoE) is expected to maintain current rates on February 1 and begin reducing rates in August. This anticipation follows a significant drop in inflation, which peaked at 11.1% in October 2022, the highest in 40 years. The Pound Sterling initially gained support from positive Purchasing Managers Index (PMI) data from the UK but lost momentum following strong PMI results from the US.
In Japan, the Bank of Japan (BoJ) acknowledged the alignment of conditions for phasing out stimulus and negative interest rates. The head of Japan's largest business lobby, Keidanren, advocated for wage increases above the inflation rate, suggesting a shift in the BoJ's monetary policy. Despite geopolitical tensions and global economic uncertainty, the Japanese Yen (JPY) is expected to avoid significant losses.
The Yuan remained stable after an announcement by China's central bank on Wednesday. The bank made a significant cut to bank reserves that will add approximately $140 billion of cash into the banking system. This move is a strong indication of support for the economy, which is currently fragile.
Gold prices lingered near a one-week low, affected by the stronger US dollar and higher bond yields after the US reported strong business activity. Investors are expecting further US GDP data and the ECB's policy meeting outcomes. Gold reached its lowest point in nearly a week following data indicating a strong start to the US economy in 2024.
Lastly, oil prices increased after reports showed a greater-than-expected decline in US crude stockpiles. Additionally, the Chinese central bank's reduction of banks' reserve ratios supported hopes for further stimulus measures and economic recovery.

 

[Zforex]

Markets Brace for Central Bank Decisions, Middle East Tensions, and Economic Uncertainties​

The dollar started the week on solid ground as investors analyzed U.S. economic data while waiting for the Federal Reserve's policy meeting, with the escalating Middle East tensions moderating risk appetite. U.S. data indicated a modest price increase in December, with the annual inflation rate staying below 3% for the third month in a row, hinting at possible rate cuts this year.

The spotlight is on the Federal Reserve's two-day policy meeting starting Tuesday, with expectations for rates to remain unchanged, thereby focusing attention on Fed Chair Jerome Powell's commentary.

The European Central Bank (ECB) kept key interest rates steady following a drop in December's underlying inflation. ECB President Christine Lagarde pointed out the Eurozone's likely stagflation in the final quarter of 2023 and the potential for further economic decline. She stressed the ECB's commitment to making decisions based on data at each meeting. ECB Governing Council member Klaas Knot noted that evidence of slowing wage growth is required before the ECB considers rate reductions. Market predictions indicate a potential 50 basis point cut by June and a 140 basis point reduction by December 2024.

The Bank of England (BoE) is expected to maintain the Bank Rate at 5.25%, possibly with a unanimous vote compared to the previous 6-3 split, by February 1. Investors await the BoE's economic projections and press conference, with Britain's stagnant economy potentially delaying the BoE's policy easing and potentially supporting the GBP.

Escalating Middle Eastern conflicts have reduced investors' interest in riskier assets, as seen in subdued equity markets. This, along with the Bank of Japan's (BoJ) hawkish turn, indicating a readiness for stimulus tapering and positive short-term rates, has strengthened the JPY.

A shift towards safer investments and expectations of a smooth U.S. economic downturn have lowered U.S. Treasury bond yields, limiting support for the USD in breaking out of its recent trading range. This also supports gold prices, although expectations of less aggressive Fed policy easing in 2024 cap gold's gains. Traders are cautiously awaiting the Federal Open Market Committee's (FOMC) policy meeting decision on Wednesday.

WTI crude futures have risen for the fourth consecutive session, reaching a three-month high following a 6.5% surge last week, driven by increased Middle Eastern conflicts over the weekend.

A drone strike, attributed by the White House to Iran-backed militants, killed U.S. troops in Jordan, prompting President Biden to announce that the U.S. will respond.

 

[Zforex]

Global Financial Markets on Edge: Fed Decision, Geopolitical Tensions, and Central Bank Moves
On Tuesday, the U.S. dollar maintained narrow ranges against major currencies as traders anticipated the Federal Reserve's monetary policy decision for hints on potential U.S. interest rate cuts. The Federal Reserve's stance is eagerly awaited amidst geopolitical tensions following a drone strike in Jordan, attributed to Iran-backed militants and resulting in U.S. troop casualties. This incident prompted a response from President Biden. Meanwhile, job openings data from the U.S. Department of Labor, expected later on Tuesday, will precede Friday's crucial payroll report.
In Europe, ECB Vice President Luis de Guindos noted that interest rate cuts by the European Central Bank could be considered once inflation stabilizes around the 2% target. He acknowledged recent positive inflation trends, suggesting they might influence future ECB policy. The forthcoming release of Eurozone and Germany's quarterly GDP figures adds to the significance of these economic developments.
The Bank of England (BoE) faces a delicate situation balancing domestic and international economic challenges with persistent inflation. Although expected to maintain current interest rates, the BoE's guidance on future rate decisions is critical for the Pound Sterling's trajectory. The UK economy experienced a 0.1% contraction in the third quarter of 2023 amid weak demand and reduced business capacity utilization. A similar trend is anticipated for the final quarter of 2023 due to cautious investment and operational decisions by businesses, wary of higher interest costs.
Last week, the Bank of Japan took an aggressive position, indicating that it is ready to phase out large stimulus measures and raise short-term interest rates from negative territory. This shift supports the Japanese Yen, especially as U.S. Treasury bond yields decline, reducing the U.S.-Japan rate differential. Investors are also eyeing potential wage increases in Japan that could lead to demand-driven inflation, allowing the Bank of Japan to adjust its ultra-loose monetary policy. Additionally, escalating Middle East conflicts could further enhance the Yen's safe-haven appeal.
Gold prices are currently stable as traders await the U.S. Federal Reserve's policy announcement and significant job data. However, geopolitical tensions in the Middle East, combined with the ongoing decline in U.S. Treasury bond yields, provide underlying support to gold prices.
Geopolitical tensions in the Middle East continue to heighten supply concerns for crude oil. A potential U.S. confrontation with Iran, a significant oil exporter, could severely disrupt global supply. Additionally, a recent attack on an oil tanker in the Red Sea raises the risk of further supply disruptions, potentially supporting crude oil prices.

 

[Zforex]

Global Economic Dynamics: Fed Policy, Geopolitical Tensions, and Market Movements

The US dollar has experienced fluctuations but remains near a three-month high, bolstered by growing expectations that the Federal Reserve may not implement aggressive rate cuts this year. Recent economic data underscored this view, with the US services sector showing a pickup in growth in January, thanks to an increase in new orders and a rebound in employment. This positive start to the year follows a surprisingly strong jobs report from the previous week, effectively supressing any expectations for early and significant rate reductions by the Fed. Fed Chair Jerome Powell and other policymakers have also expressed skepticism towards the idea of steep rate cuts in the near term.
In Europe, the Euro (EUR) saw downward pressure after the release of weaker Producer Price Index (PPI) data, signaling a disinflationary trend within the European Union (EU). This situation could lead the European Central Bank (ECB) to contemplate policy easing measures to counteract these trends.
In the United Kingdom, the latest S&P Global/CIPS Services PMI data for January provided support for the Pound Sterling, outperforming expectations with a reading of 54.3 against the forecasted 53.8. This improvement, attributed to a robust flood of new orders and strong hiring over the past six months, has buoyed optimism for potential rate cuts by the Bank of England (BoE), supporting a sharper recovery for the Pound. Despite these positive domestic indicators, the near-term outlook for risk-sensitive assets remains bearish due to broader economic uncertainties.
The Reserve Bank of Australia (RBA) held interest rates steady at a 12-year high of 4.35% in its February meeting, aligning with expectations. However, the RBA hinted at the possibility of further rate hikes to curb inflation, with investors and economists now anticipating any potential rate cuts to be delayed until at least the latter half of the year.
Geopolitical tensions, particularly in the Middle East and concerns over China's economic slowdown, have provided a degree of support for safe-haven assets like Gold. Ongoing conflicts and diplomatic efforts in the region, including the US's involvement in Yemen and Secretary of State Antony Blinken's visit to the Middle East, underscore the complex geopolitical landscape that could influence global markets.
Meanwhile, West Texas Intermediate (WTI) oil prices have risen, continuing gains from the previous session amid escalating tensions in the Middle East that pose risks to the region's oil supply.

 

[Zforex]

Dollar Strengthens with Inflation Surprises and Anticipation of Central Bank Moves

The dollar hovered near three-month highs against major currencies on Wednesday, as traders adjusted their expectations for a Federal Reserve interest rate cut, following unexpectedly high US inflation figures. Market forecasts now suggest no rate cut in March and less than a 50% likelihood of easing in May.
Investors are also keenly anticipating the release of preliminary Gross Domestic Product (GDP) data on Wednesday, and a significant speech by Christine Lagarde, President of the European Central Bank (ECB), set for Thursday. There is increasing speculation about the ECB potentially cutting interest rates early in the second quarter, despite the bank's cautious narrative about needing further confirmation before any rate adjustments.
In the UK, the latest data from the Office for National Statistics revealed a 0.6% monthly decrease in the Consumer Price Index (CPI) for January, following a 0.4% increase in December. Year-on-year, the headline CPI rose by 4.0%, slightly below the anticipated 4.2%. The Core CPI, which excludes volatile food and energy prices, increased by 5.1% year-on-year in January, just shy of the 5.2% forecast. This data suggests a slight easing in inflation, potentially leading markets to expect an earlier rate cut by the Bank of England.
Japan's leading currency diplomat, Masato Kanda, expressed concern over rapid FX movements, emphasizing close monitoring and readiness to take necessary actions to mitigate adverse economic impacts. He noted that the current yen weakness is a result of both fundamental factors and speculative trading.
The dollar-yen exchange rate has been influenced by the rise in long-term US Treasury yields, which reached a 2-1/2-month high of 4.332% on Wednesday. This movement aligns with the US consumer inflation report that exceeded expectations, reinforcing expectations that the Fed will maintain higher interest rates for an extended period. While this outlook dampens appeal for non-yielding assets like gold, various factors have mitigated the downside, leading to a notable decline in gold prices toward the critical $2000 level.
Oil prices witnessed a rebound on Wednesday, overcoming earlier losses. This change was supported by OPEC's consistent forecast for high demand growth this year and an industry report indicating a significant reduction in US fuel stockpiles, exacerbated by a refinery outage.