Weekly Market Outlook For January 29th To February 4th
Forex
USD
Fed Chair Jerome Powell’s press conference after the meeting will attract a lot of attention as traders will focus on the central bank’s forward guidance.
The dollar gained strength last week, with the dollar index closing near the 103.5 level on Friday. US treasury yields edged higher last week, with the US 10-year bond yielding approximately 4.14% on Friday.
This week all eyes will be on the US Federal Reserve and the monetary policy decision on the 31st. The Fed kept interest rates unchanged at its December meeting, within a target range of 5.25% to 5.50%. The US central bank is expected to leave interest rates unchanged again this week.
Fed Chair Jerome Powell’s press conference after the meeting will attract a lot of attention as traders will focus on the central bank’s forward guidance. Market expectations of future rate cuts fluctuate wildly and are one of the primary drivers of the dollar.
Markets are pricing in a dovish shift in the Fed’s policy as soon as March with over 50% probability. Most analysts, however, predict that the central bank will hold off interest rate cuts until May.
If the Fed removes the tightening bias from its policy statement, markets will interpret this as a sign that the central bank is ready to pivot, which will weaken the dollar. If, on the other hand, the central bank retains a hawkish stance, we expect to see the US dollar and treasury yields go up.
Core PCE price index rose by 0.2% in December according to data released on Friday, which was in line with expectations. Core PCE price index dropped to 2.9% year-on-year in December from a 3.2% print in November. This is the Federal Reserve’s preferred inflation gauge, and a lower print indicates that price pressures in the US are easing.
US GDP data released on Thursday surprised to the upside, boosting the dollar. Advance GDP for the final quarter of 2023 showed that the US economy expanded by 3.3% against the expectation of a more modest 2.0% growth. The US economy is expanding at a slower pace, as final GDP data have shown expansion by 4.9% in the third quarter of 2023, but economic growth in Q4 of 2023 exceeded expectations. Advance GDP Price Index data were also released on Thursday and fell below expectations. This is an indicator of inflation, and a lower print indicates cooling price pressures in the US. Advance GDP Price Index for the final quarter of 2023 came in at 1.5% against expectations of 2.3% and a final print of 3.3% in the previous quarter.
Robust economic activity data released on Wednesday provided support for the dollar. Both Manufacturing and Services PMI data surprised the upside, indicating an improved economic outlook. Flash Manufacturing PMI for January rose above the threshold of 50 which denotes industry growth with a print of 50.3 up from 47.9 in December and against the 47.6 expected. Flash Services PMI for January rose to 52.9 from 51.4 in December exceeding expectations of a 51.4 print.
Headline inflation rose by 3.4% year-on-year in December from a 3.1% print in November against the expectation of a 3.2% raise. Monthly CPI rose by 0.3% in December, exceeding expectations of a 0.2% print. Core CPI, which excludes food and energy, rose by 0.3%, in line with expectations. Inflation in the US remains sticky and may put pressure on the Fed to keep interest rates at high levels for longer.
EUR
ECB President Christine Lagarde stated that interest rates are at sufficiently high levels to bring inflation down to the central bank’s 2% target.
The Euro dipped last week after the ECB rate decision on Thursday, and EUR/USD ended the week near the 1.085 level. If the EUR/USD pair declines, it may find support at 1.072, while resistance may be encountered near 1.095.
The ECB announced its interest rate decision on Thursday and the central bank kept interest rates unchanged at 4.50% as expected. The ECB press conference following the conclusion of the meeting did not hold many clues on the ECB's policy direction. ECB President Christine Lagarde stated that interest rates are currently at sufficiently high levels to bring inflation down to the central bank’s 2% target over time. Lagarde also reiterated that ECB interest rates will remain at sufficiently restrictive levels for as long as necessary.
Markets are pricing in rate cuts this year, although ECB policymakers are concerned about persistent inflationary pressures in the Eurozone. The ECB is expected to pivot to a more dovish policy later this year, but the timeline is still uncertain. Markets anticipate rate cuts of around 140 bps in 2024. Odds of ECB rate cuts starting in April are rising, and markets are pricing 50bp of rate cuts by June.
Economic activity data released on Wednesday for the Euro area were disappointing, indicating diminishing economic growth. Flash Manufacturing PMI in January remained firmly in contractionary territory, with a print of 46.6, well below the threshold of 50 that denotes industry expansion. January’s Manufacturing PMI, however, was above December’s 44.4 reading, indicating that the manufacturing sector is shrinking at a reduced pace. Flash Services PMI data for January were less optimistic though, with a 48.4 print, down from 48.8 in December and against expectations of a 49.1 print.
Final EU CPI data for December showed that Eurozone inflation remains sticky, indicating that the ECB still has some ground to cover to ensure that inflation drops sustainably. EU Final CPI for December came at 2.9% year-on-year from 2.4% in November. Core Flash CPI for December dropped to 3.4% from a 3.6% print in November, which aligned with expectations.
The economic outlook of the Eurozone appears to be deteriorating and may force the ECB to pivot to a more dovish policy. The Eurozone economy does not show signs of recovery and is on the brink of recession. Revised GDP for the Euro area showed that the Eurozone economy contracted by 0.1% in the third quarter of the year, which was in line with expectations. The Eurozone economy barely expanded in the second quarter by 0.1%, after contracting by 0.1% in Q1 of 2023. Year-on-year the EU economy registered stagnation with GDP flat at 0%. The Eurozone economy is struggling and cannot withstand much further tightening.
GBP
If the Fed shows signs of a dovish pivot earlier than the BOE, the Sterling might gain strength against the dollar.
GBP/USD traded sideways last week, oscillating around the 1.270 level. If the GBP/USD rate goes up, it may encounter resistance near 1.270, while support may be near 1.260.
The BOE maintained its official rate at 5.25% at its latest policy meeting, which was in line with expectations. The central bank’s outlook remains hawkish, however, with three policy members voting to increase interest rates versus six members voting to maintain current rates.
BOE Governor Andrew Bailey has kept a hawkish stance, stressing that inflationary pressures in the UK remain high and that further tightening might be required to bring inflation down to the bank’s 2% target.
The BOE will likely keep interest rates on hold for some time to bring inflation down. Even though the current restrictive policy is hurting economic growth, the BOE has no choice but to continue its battle against inflation.
Market expectations of the BOE’s future direction reflect the need to keep interest rates in restrictive territory for longer, with BOE rate cuts not expected before May. This week the Fed’s policy decision on the 31st is expected to affect the GBP/USD rate considerably. If the Fed shows signs of a dovish pivot earlier than the BOE, the Sterling might gain strength against the dollar.
On the data front, robust UK fundamentals boosted the Sterling on Wednesday. Flash Manufacturing PMI data for January showed that the British manufacturing sector remains in contractionary territory, but the sector is shrinking at a reduced pace. Manufacturing PMI rose to 47.3 in January from 46.2 in December, against 46.7 expected. The Services sector continued to expand in January, with a print well above the threshold of 50. Services PMI rose to 53.8 in January from 53.4 in December versus 53.1 expected.
Public Sector Net Borrowing data on Tuesday showed that Britain’s budget deficit for December was lower than expected, increasing chances of tax cuts in March’s budget. Public Sector Net Borrowing dropped to 6.8B in December from 12.8B in November against expectations of 11.4 B.
Headline inflation rose to 4.0% year-on-year in December from 3.9% in November, against expectations of a 3.8% print. This marked the first rise in consumer inflation in 10 months, increasing the odds the BOE will keep interest rates at high levels for longer. Annual Core CPI, which excludes food and energy, grew at the same pace of 5.1% in December as in November, beating the 4.9% forecast.
The British economy remains fragile, reinforcing the notion that the BOE has reached its peak interest rates. Monthly GDP rose more than expected in November, however, inspiring more optimism on the UK’s economic outlook. The British economy expanded by 0.3% in November against expectations of a 0.2% growth and 0.3% contraction in October. Final quarterly GDP data revealed that the British economy contracted by 0.1% in the third quarter of 2023, against expectations of stagnation. The British economy expanded by 0.3% in the first quarter of the year and 0.2% in the second quarter.
JPY
BOJ Governor Kazuo Ueda stated that the likelihood of Japan sustainably achieving the bank's 2% inflation target was gradually increasing.
USD/JPY dipped early last week dropping to 146.6, then rallied towards the end of the week, closing near the 148.1 level on Friday. If the USD/JPY pair declines, it may find support near 145.5. If the pair climbs, it may find resistance near 148.8.
Japanese Government 10-year bond yields have been rising after the BOJ meeting on Tuesday, boosting the Yen. The BOJ kept all policy levers unchanged on Tuesday, maintaining its ultra-easy monetary policy. The BOJ has been keeping interest rates at a negative level, putting pressure on the Yen. The BOJ has so far maintained its dovish bias as other major central banks, and especially the Fed, have raised interest rates to high levels.
BOJ Governor Kazuo Ueda delivered a speech with hawkish undertones on Tuesday, hinting at a policy shift down the road. Ueda stated that the likelihood of Japan sustainably achieving the bank's 2% inflation target was gradually increasing. Ueda’s comments increased market odds of a hawkish pivot later in the year. The Yen gained strength on Tuesday after Ueda’s Press Conference but plummeted again as markets pondered the uncertainty of a policy shift.
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An immediate policy shift is not expected yet, but markets are pricing in the first BOJ rate hike in April with over 50% probability. A rate hike by June is considered almost certain, with market odds giving over 90% probability of a shift in the BOJ’s monetary policy by June. Only a small rate hike of 10bps is considered likely, which would bring the BOJ’s interest level from negative to zero.
The BOJ also released the first Quarterly Outlook for Economic Activity and Prices Report for 2024 on Tuesday. In the Quarterly Outlook, the BOJ lowered its forecasts for core inflation from 2.8% to 2.4% in 2024. The Report hinted that consumer inflation in Japan is likely to increase towards the central bank’s target based on wage growth.
Inflationary pressures are not sufficiently high in Japan to justify a shift to a more hawkish policy yet. PPI remained flat year-on-year in December, exceeding expectations, however, of a 0.3% decline. National Core CPI data showed that Japanese inflation cooled further in December with headline inflation at 2.3% year-on-year from a 2.5% print in November. Tokyo Core CPI also dropped slightly to 2.1% in December from 2.3% in November.
Final GDP data for the third quarter of the year showed that Japan's economy contracted by 0.5% in the third quarter against earlier estimates of a 0.5% contraction. The Japanese economy expanded by 1.2% in the second quarter of 2023, showing that the country’s economy is shrinking and is on the brink of recession. Final GDP Price Index showed a 5.3% annual expansion in Q2, versus 3.5% the previous quarter. This is a measure of inflation, which shows that inflationary pressures are rising in Japan, increasing the odds of a hawkish shift in the BOJ’s policy.
Gold
Gold prices are expected to depend largely on the Fed’s forward guidance after the monetary policy meeting on the 31st.
Gold prices edged lower last week, ending the week near the $2,018 per ounce level. If gold prices increase, resistance may be encountered near $2,040 per ounce, while if gold prices decline, support may be encountered near $2,000 per ounce.
This week, gold prices are expected to depend largely on the Fed’s forward guidance after the monetary policy meeting on the 31st. The Fed kept interest rates unchanged at its December meeting, within a target range of 5.25% to 5.50%. The US central bank is expected to leave interest rates unchanged again this week.
Fed Chair Jerome Powell’s press conference after the meeting will attract a lot of attention as traders will focus on the central bank’s forward guidance. Market expectations of future rate cuts fluctuate strongly and are one of the primary drivers of the dollar, as well as of gold prices. Central banks’ interest rates affect gold prices since assets yielding interest become a more appealing investment compared to gold as interest rates rise.
If the Fed removes the tightening bias from its policy statement, markets will interpret this as a sign that the central bank is ready to pivot, which will weaken the dollar, boosting gold prices. If, on the other hand, the central bank retains a hawkish stance, we expect to see the US dollar and treasury yields go up and gold prices drop.
Gold prices have been predominantly directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar gained strength last week, with the dollar index closing near the 103.5 level on Friday. US treasury yields edged higher last week, with the US 10-year bond yielding approximately 4.14% on Friday.
Gold prices are propped up by rising geopolitical tensions, which raise the appeal of safe-haven assets. Concerns that the Geopolitical crisis in the Gaza area may spread to neighboring countries are raising demand for safe-haven assets, boosting gold prices. The war between Israel and Hamas is threatening to spill over the Middle East as tensions rise in the Red Sea area.
Attacks on ships in the Red Sea area by Yemen's Iran-backed Houthi militia increase concerns that the crisis will widen to other areas in the region. The US and the UK have launched a coordinated action against Houthi rebels in Yemen. The coalition delivered new airstrikes against Houthi rebels in Yemen overnight on Monday. Houthi troops retaliated on Wednesday, launching new attacks on ships off Yemen's coast, increasing concerns for the oil transportation routes in the area.
Oil
US crude oil inventories showed a surprisingly large draw by 9.2M barrels in US crude stockpiles, boosting oil prices.
Oil prices surged last week with WTI price touching the $78 per barrel level on Friday. If WTI price declines, it may encounter support near $70.5 per barrel, while resistance may be found near $79.0 per barrel.
Supply concerns boost oil prices, as the crisis in the Gaza area threatens to disrupt oil distribution. Tensions around the Red Sea area have been rising, raising concerns that hostilities may spread in the Middle East, affecting oil supply and distribution. Iran-backed Houthi militants are attacking commercial vessels in the Red Sea. The US and the UK have launched a coordinated action against Houthi rebels. The coalition delivered new airstrikes against Houthi rebels in Yemen overnight on Monday, boosting oil prices. Houthi troops retaliated on Wednesday, launching new attacks on ships off Yemen's coast, increasing concerns for the oil transportation routes in the area.
US crude oil inventories released on Wednesday showed a surprisingly large draw in US crude stockpiles, boosting oil prices. The US Energy Information Administration reported that weekly crude stocks fell by 9.2M barrels for the week to January 19, following another drop of 2.5M barrels the week before and falling short of expectations of a smaller drop by 1.2M barrels.
Oil prices are kept in check by a strong US dollar and high-interest rates. This week all eyes will be on the US Federal Reserve and the monetary policy meeting on the 31st. The Fed kept interest rates unchanged at its December meeting, within a target range of 5.25% to 5.50%. The US central bank is expected to leave interest rates unchanged again this week. Fed Chair Jerome Powell’s press conference after the meeting will attract a lot of attention as traders will focus on the central bank’s forward guidance.
China’s poor economic outlook is increasing concerns of reduced oil demand, putting a lid on oil prices, despite increasing geopolitical risks. Weak economic growth in China raises concerns about future demand, pushing oil prices down.
However, the global Oil demand outlook has increased as the International Energy Agency (IEA) joined producer group OPEC in forecasting strong growth in global oil demand. The IEA monthly report stated that oil demand is expected to grow by 1.24M barrels per day in 2024, up by 180K barrels per day from its previous projection. OPEC has also reported a high oil demand forecast, expecting a growth in demand of 2.25M barrels per day this year.
Cryptocurrencies
Crypto markets exhibited high volatility last week, plummeting early in the week and then rallying towards the end of the week.
Crypto markets exhibited high volatility last week, plummeting early in the week and then rallying towards the end of the week. Bitcoin price plummeted below the key $40,000 level early in the week, touching $39,000. Bitcoin selloff was arrested on Wednesday as bulls fought to regain market control. Bitcoin gained strength over the weekend, rising above the $42,000 level. If BTC price declines, further support can be found at $39,000, while resistance may be encountered near $43,500.
Ethereum price also dipped early last week, dropping below the $2,200 level. Ethereum pared some of the week’s losses over the weekend, rising to the $2,250 level. If Ethereum's price declines, it may encounter support near $2,160, while if it increases, resistance may be encountered near $2,500.
Markets are under pressure by increased risk-aversion sentiment caused by rising geopolitical tensions. Concerns that the Geopolitical crisis in the Gaza area may spread to neighboring countries drive risk sentiment down putting pressure on risk assets. The US and the UK have launched a coordinated action against Houthi rebels in Yemen. The coalition delivered new airstrikes against Houthi rebels in Yemen overnight on Monday, souring risk sentiment.
The approval of Bitcoin spot exchange-traded funds (ETFs) by the Securities and Exchange Commission (SEC) has caused cryptocurrency prices to surge over the past few weeks. The SEC finally approved 11 applications but the enthusiasm over the approvals did not last long. Crypto markets are deflating as the boost they received from the hype created over the approval of Bitcoin spot ETFs is fading.
This week, all eyes will be on the US Federal Reserve and the monetary policy meeting on the 31st. The Fed kept interest rates unchanged at its December meeting, within a target range of 5.25% to 5.50%. The US central bank is expected to leave interest rates unchanged again this week.
Fed Chair Jerome Powell’s press conference after the meeting will attract a lot of attention as traders will focus on the central bank’s forward guidance. Increases in central banks’ interest rates are putting pressure on risk assets. Markets are expecting a dovish pivot later this year, however, propping up crypto markets.
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