RedFX Update: 2 central bank meetings, GDP data & escalating global tensions
The week ahead has plenty of data and central bank meetings – the focus will be on the TIMING of rate cuts that will affect currency movements through 2024. Economists will continue the debate of how quickly western economies will start cutting rates.
The week is off to a lively start with Evergrande in China being forced into liquidation after 2yrs of floundering and indecision by the courts. This will have huge consequences throughout China’s fragile property market as the world’s largest property developer folds against a backdrop of declining productivity, massive supply-chain issues and a world increasingly finding other suppliers outside of China.
Mohamed El-Erian uses a spectacularly accurate description of how to approach the week:
“Keep an eye also on geopolitical developments, especially as the US gets pulled deeper into the deadly and destructive multi-dimensional tragedy in the Middle East.”
USD: There remains an underlying bid for USD due to the troubles in the Middle East and surrounding area. The US economy continues to show strength – GDP numbers last week were much better than expected, and although there are lingering inflationary fears it continues to outperform its global peers. Wednesday evening’s Federal Reserve meeting is the near-term focus for the USD, swiftly followed by Friday’s employment data.
EURO: The ECB has a tricky task ahead, with the Eurozone economy broadly stagnant and inflation appears to be falling but unconvincingly. The recent weakness (across all sectors) in Germany is exacerbating European weakness. Along with some bleak sentiment data and Germany’s domestic problems, the ECB needs to time any interest rate cuts very carefully.
ECB member Guindos summarised the line that the ECB has taken recently:
“We will cut interest rates when we are sure that inflation meets our 2% goal.” In other words, we are not in a rush, but will react only when / if we are confident.
EUR/USD has fallen back under 1.0900 but this week’s GDP data could be the jolt we need.
GBP: Still strong, despite weak GDP. GBP/USD is at 1.2700 and is hovering near annual highs but has not gathered much traction recently. The reason is that economists believe US will cut rates faster and sooner than the UK. Inflation in the UK is stickier than Europe and the US and there are signs that the UK economy is flatlining at best.
Last week’s data was pretty much in line with expectations, and this morning saw Inflation EXPECTATIONS for the 12 months ahead fell from 4.2% in October to 3.9% and 3.5% in November and December respectively. UK inflation expectations for the long term declined to 3.4%. The Bank of England will be buoyed by this, hopefully confirming that high interest rates are combating inflation and can eventually be cut. All eyes on Thursday’s bank of England meeting.
The week ahead:
•Monday: US Business Activity Index
• Tuesday: AUD Retail Sales / EUR GDP / / German GDP / US Consumer Confidence
• Wednesday: China Manufacturing PMI / AUD Inflation / German Retail Sales / German Inflation / US Federal Reserve rate decision & Press Conf
•Thursday: China Manufacturing / EUR Inflation / UK interest Rate Decision & Press Conf / US Manufacturing
•Friday: UK Retail Sales / US Employment data