Economic Update

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Economic Update

USD strengthens after Powell's remarks and nonfarm payrolls surge​

6 minute read

05 February 2024

GBP

Last Thursday, the Bank of England held rates again at 5.25%. Six of the nine-panel committee voted to leave rates where they were, while two voted to increase rates to 5.5%, and one member voted to cut rates. This was the first time in four years that a policymaker had voted to reduce rates.

Overnight interest rate swaps suggest that four rate cuts are priced in for 2024, which would move the bank rate down to 4.25%, although it’s still uncertain whether the first will come in May or June.

The Bank of England also said on Thursday that inflation could fall to 2% in Spring before rising again due to energy costs. If inflation drops to these levels, it may add to any downward pressure on Sterling.

This week is a relatively quiet one in terms of data releases for Sterling. We’ll see the latest Halifax house price index come out 7am on Wednesday 7th February, which is forecasted to slow from 1.1% to 0.8%, as well as a handful of Monetary Policy Committee members speaking throughout the week.

EUR 

Markets are currently pricing the most rate cuts from the European Central Bank this year (compared with the Fed and BoE), with five or six already priced in. Governing Council Member Mario Centeno seemed to back this narrative with his comments at the Warwick Economics Summit when he implied the ECB would have to react to slowing inflation by loosening monetary policy.

Bloomberg also reported that Centeno highlighted that the eurozone could be in trouble, stating: “We cannot have an economy that does not grow; that’s my main concern about Europe.” He added that after five quarters without growth, “the first quarter of 2024 may be the sixth. This is one and half years of stagnant economy.”

If the economic outlook for the eurozone is as bleak as economists are currently suggesting, the ECB may be forced to cut rates earlier than the Fed and BoE. This could see the Euro continue its slide against the Pound and Dollar.

This week, Eurozone Retail Sales are due for release on Tuesday at 10am and are forecasted to fall from -0.3% to -0.9%. Other notable releases are the ECB’s Economic Bulletin, released at 9am on Thursday and Germany’s final month-on-month CPI inflation data on Friday at 7am, which is expected to remain at 0.2%.

 

USD 

The Federal Reserve also held rates steady on Wednesday last week, leaving interest rates at 5.50% - where they have sat since July 2023.

This was followed by further commentary from the central bank’s Chair Jerome Powell last night, when he reiterated that a March interest rate cut would be very unlikely. However, the Fed will still be keeping a firm eye on economic data before the March meeting; any signs of inflation closing in on 2% could prompt policymakers to cut rates. Treasury yields have jumped following Powell’s comments as traders begin to discount a March cut, giving the dollar a boost to start the week.

On the other hand, current employment data in the US is looking particularly healthy, with non-farm payrolls rising by 353K against a forecast of 180K on Friday. If employment data consistently comes in better than expected, and the US continues to operate near full employment, it could cause the markets to rethink the five currently priced in for this year. We might see an outcome that’s more aligned with the Fed’s Dot Plot that came out in December, indicating only three or four rate cuts throughout 2024.

It will be a relatively quiet week in the US, too, with just a couple of data releases to note. US ISM Services PMI will be released at 3pm today, which is forecast to increase from last month’s reading of 50.6 to 52.0. US Unemployment Claims are also out Thursday at 1:30pm and are expected to fall from 224K to 219K.

We’ll also continue to monitor any developments or changes in the current Red Sea supply pressures or tensions in the Middle East and their potential impact on the dollar and the broader currency market.

This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory

 

 

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