04.01.23: US Data Releases and Fed Rhetoric Crucial for Near-Term Sterling and Euro Moves against the Dollar There
04.01.23: US Data Releases and Fed Rhetoric Crucial for Near-Term Sterling and Euro Moves against the Dollar
There is scope for further volatility across exchange rates in the short term, especially with strong moves associated with asset allocations at the start of 2023.
Overall volatility should ease slightly, but there will still be an important risk of choppy trading across asset classes, especially given major uncertainty surrounding the US and Chinese economies.
The immediate focus will be on the US economy with important data releases and Federal Reserve rhetoric.
Evidence of weak US growth would spark fresh speculation that the Federal Reserve will be able to adopt a less aggressive monetary policy.
The focus will then be on Fed minutes to assess whether the central bank will respond to evidence of weaker demand.
The Chinese economy will also be extremely important as Beijing re-orientates towards prioritising the economy rather than coronavirus containment.
Commerzbank sees scope for a stronger rebound in the Chinese economy with risks to the upside for their current 2023 GDP growth forecast of 4%.
The bank expects that once a majority have been infected, there will be a rebound in spending. The bank added; “It also seems unlikely that the authorities will re-impose controls despite a spike in infections. The government looks keen to prioritize economic recovery in 2023 and seems to prefer quickly getting over with the Covid situation to jump start the economy rather than dragging it out further.”
ING is a little more cautious on China, but notes the importance of energy prices; “It feels a little too early for fund managers to bet the farm on this story, where instead the nation appears to be weathering the storm before shutting down for the Lunar New Year on 23 January. That said, global growth prospects are also receiving a lift from the sharp fall in global energy prices (especially gas) and thus it should not be a surprise to see equity markets starting the New Year on the front foot.”
Pound US Dollar Exchange Rate Outlook
The Pound to Dollar (GBP/USD) exchange rate posted sharp losses after Tuesday’s European open with a slide below the 1.2000 level triggering a wave of selling. As the dollar posted strong gains, GBP/USD slumped to 1-month lows fractionally above 1.1900.
There was a strong recovery later in the day with a recovery back above 1.2000. Despite a fresh setback, GBP/USD traded above this level on Wednesday as the dollar dipped again.
Overall confidence in the UK economy will remain very fragile, but lower energy prices will provide an element of relief with near-term evidence on consumer spending watched closely.
International risk trends and the degree of confidence in the global economy will be important. The Pound will be in a much stronger position if global equities make headway and there is optimism over a rebound in China.
The quick GBP/USD recovery on Tuesday will help underpin sentiment and there will be a fresh boost to confidence if the pair can hold above 1.2000 with scope for a challenge on 1.2100.
Euro (EUR) Exchange Rates Today
The Euro was unable to make headway in early Europe on Tuesday and then posted sharp losses.
There was a sharp decline in the German year-on-year inflation rate to 8.6% from 10.0%. This was well below expectations of 9.1% and the lowest reading for five months.
The decline in inflation triggered some speculation that the ECB would be able to adopt a less hawkish policy stance.
The Euro to Dollar (EUR/USD) exchange rate posted sharp losses to a 3-week low at 1.0520 before a recovery to 1.0590 on Wednesday.
Energy prices will be watched closely in the short term with significant declines on Tuesday.
Oil prices retreated and European gas prices dipped sharply to 10-month lows as many European countries recorded record January temperatures.
Lower energy prices will provide important protection for the Euro-Zone economy and also underpin the Euro with solid EUR/USD support on any dips towards 1.0500.
US Dollar (USD) Exchange Rates Outlook
The US dollar posted strong gains after Tuesday’s European open with a surge against European currencies.
The dollar index posted 2-week highs amid strong demand for the US currency at the start of 2023.
Markets took note of the seasonal trends with the US currency tending to post gains in January, but there are also expectations of a weaker dollar for 2023 as a whole.
Federal Reserve expectations and the degree of confidence in the US economy will be important drivers for near-term dollar sentiment.
The currency is likely to lose ground if there is evidence of a weaker US economy.
Any recovery in the Chinese economy would also limit scope for the dollar to generate defensive demand and there is likely to be dollar selling on rallies.
Other Currencies
There was further choppy yen trading during Tuesday.
The Pound to Yen (GBP/JPY) exchange rate posted fresh 3-month lows just below 155.50 before a recovery to 156.70 on Wednesday.
The Pound to Swiss franc (GBP/CHF) exchange rate recovered to 2-week highs above 1.1260 before a retreat to 1.1185.
The Pound to Australian dollar (GBP/AUD) exchange rate hit resistance close to 1.7850 and posted sharp losses to 6-week lows near 1.7600 as the Australian dollar recovered strongly.
The Day Ahead
There are important US data releases on Wednesday with the ISM business confidence data for manufacturing. The latest data on job openings will also be released at the same time.
The Federal Reserve will release the minutes from December’s policy meeting.
The data and rhetoric within the minutes will be important for confidence in the US economy and expectations surrounding Federal Reserve policy.
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