FX Weekly Update – January 29th, 2024

Posted Under: Weekly updates

In spite of the ECB meeting and a flurry of economic activity data, the volatility in the FX market was relatively muted last week, with G10 currencies registering a maximum 0.6% change against the US dollar.

This week is set to be even busier in terms of economic releases and policy announcements. We would not be surprised to see some pick-up in volatility. On Tuesday, the attention will be on the Eurozone’s fourth-quarter GDP data, which may seal the deal on technical recession. On Wednesday morning, market sentiment might be impacted by China’s January PMI data. On Wednesday evening, all eyes will be on the Fed, and Thursday will belong to the Bank of England. On the same day, inflation data for the Eurozone will be out. Non-farm payroll report from the US will close this unusually busy week.

GBP: Sterling ended the week unchanged against the greenback and reached its strongest position since August against the broadly weaker euro. PMI data released last week provided for a good start to 2024, with all key indices increasing and composite PMI reaching 52.5, its highest level in eight months. This alleviates some concerns over the prospects of the British economy, which were recently reinforced by particularly bleak retail sales data for December. It also supports our belief that some forecasters may need to rethink their outlooks. This includes the Bank of England, which pencilled in ‘broadly flat’ growth for this year. It is also worth noting that, similarly to PMIs, GfK consumer sentiment data increased more than expected, with the index now at -19. Brits are still gloomy about their prospects, but the least gloomy they have been in two years. We suspect that progress on inflation, which helps to keep real wage growth back in positive territory and brings about prospects for lower interest rates, is indeed lifting moods. January’s cut in national insurance costs must have also been welcomed by households.

This week the focus will be squarely on the Bank of England. We think another 6-3 vote is likely and will be particularly attentive to how the bank handles communications around the possibility of further hikes and prospects for rate reductions. All in all, we think the Bank has valid reasons to lag behind its major peers in cutting rates this year and see the June MPC meeting as the earliest date for the beginning of its rate cut cycle.

EUR: January PMI data was marked by dichotomies: a surprisingly sharp increase in manufacturing PMI was accompanied by a mild, yet unexpected drop in services index. Moreover, a poor showing in the Eurozone’s biggest economies – Germany and France – contrasted with positive news from smaller ones. For the time being, the stagnation narrative continues.

Turning to monetary policy, a lack of explicit pushback against market pricing for cuts from President Lagarde at last week’s ECB meeting encouraged markets to ramp up their April rate cut bets. Unsurprisingly, the euro was dragged lower. Investors now see approximately 85% chance of such a move versus 65% prior to the meeting. We also see it as realistic but would be particularly attentive to signals on the inflation and labour market fronts in the period ahead. This week, the attention will be on the Q4 GDP data and the January inflation release. As for the former, the consensus is pencilling in a minimal contraction, sealing a technical recession. HICP data is set to be more pleasing to the eye, with progress on inflation expected to continue: both the headline and core measures should show declines.

JPY: Yen’s appreciation following the BoJ meeting proved short-lived, with the currency ending the week almost unchanged against the US dollar. Governor Ueda’s tone on Tuesday was more hawkish than in December. Instead of stressing uncertainty, he signalled that the inflation target is approaching, mentioning the impact of higher wages on services costs. Should the wage-inflation cycle continue, the decisionmakers are set to examine the ultra-loose stance of the central bank, as he emphasised. Following the mild hawkish turn from the BoJ, markets have slightly ramped up their rate hike bets. A 10bps increase in April is now 70% priced-in as compared to 50% prior to the meeting. Their further increase seems to have been blocked by surprisingly soft inflation data from Tokyo. Core inflation in Japan’s capital fell from 2.1% to 1.6%, below the 1.9% pencilled in by the consensus.

Similarly to markets, we continue to consider a move in April as realistic, particularly if the economic readings released in the meantime prove strong and we see further signs of a brawny labour market. There is plenty of data to look out for this week. The emphasis will be on the first half of the week when the labour market, retail sales and industrial production data for December will be out.

CAD: The Canadian dollar fell to a one-month low against its US counterpart after last week’s Bank of Canada’s dovish pivot. The CAD has, however, recovered these losses, aided by higher oil prices. in**@eb***.com | ebury.com At its meeting last week, the Bank of Canada kept the overnight rate at 5% for the fourth consecutive meeting. We witnessed a visible shift in communications, which has bolstered market confidence that monetary policy easing is approaching. Statements from Governor Tiff Macklem and the accompanying press release made it clear that rates could not remain high for too much longer, especially given worries regarding growth prospects. Markets are currently pricing in a 55% chance of a first cut in April, yet we see the June meeting as a safer bet. Looking ahead, we believe there is room for the CAD to post gains against the US dollar. That said, recent dovish communications from the BoC make the Canadian currency less attractive. With no major data releases in Canada this week, the CAD should react primarily to changes in oil prices and events elsewhere, in particular, the Fed meeting on Wednesday.

CNY: Last week brought a long-awaited rebound in sentiment towards Chinese assets. The rally included the Chinese yuan, which outperformed the vast majority of its EM peers and ended higher against the US dollar. The revival in asset prices followed a combination of news pointing to increased authorities’ support for the equity market and the economy at large. Bloomberg reported that engaging about 2 trillion yuan in mostly offshore money to prop up stocks is being considered, which was particularly well-received by investors. It was followed by a series of announcements from authorities, the biggest one being an unusual announcement by Pan Gongsheng. who informed the public that the PBOC will slash the banks’ reserve requirement ratio (RRR) by 50bps from the 5th of February, freeing up 1 trillion yuan in long-term liquidity. Macro-wise, last week did only bring industrial profits data, which showed a 2.3% contraction in 2023, marking the second straight year of declines. Looking ahead, attention will be on January PMI data, which may extend – or break – the improvement in sentiment towards Asia’s largest economy. NBS PMIs are set to be published on Wednesday, with manufacturing Caixin PMI out on Thursday.

MXN: is essentially unchanged on the day as and lower by 1.7% from last week’s highs. Note that continued strength in polling by former President Trump may create volatility in the pair as the border crisis is a cornerstone of his most vocal views and he would be prepared to act on it using tariffs as he has done in the past.