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US dollar edges lower after PCE inflation data

 

Monday, January 29, 2024

Today’s headlines

What’s happening: The US dollar fell on Friday, as investors assessed the latest inflation data.

What happened: Inflation rate in the US slowed more than expected last month, which raised speculations of the US Federal Reserve being on track to cutting interest rates by mid-2024.

However, the overall volume traded eased during the end of the session ahead of some major economic reports due this week.

Why it matters: Data showed US core PCE prices, excluding food and energy, increased by 0.2% in December, in-line with market expectations, but higher than the 0.1% rise in November. Core PCE prices rose 2.9% year-over-year in December, below projections of 3%. This was also the lowest level recorded since February 2021. The PCE inflation data is the Fed’s preferred measure for inflation.

Personal income in the US increased by 0.3%, while personal spending rose by 0.7% in December. US pending home sales surged 8.3% in December, topping market estimates of a 1.5% increase.

Data released on Thursday showed the US economy remaining resilient despite higher borrowing costs, with GDP growing at an annualised rate of 3.3% in the fourth quarter, stronger than market estimates of 2% growth.

While some traders expect the Fed to begin cutting interest rates at its March meeting, there are growing speculations of the central bank delaying the cuts to May, with prospects of five rate cuts of 25 bps each projected this year.

The US dollar index, which measures the greenback’s performance versus a basket of major peers, fell 0.1% to 103.47 on Friday. However, the index recorded gains for four consecutive weeks, adding around 0.2% last week.

The EUR/USD forex pair gained slightly to 1.0855 on Friday, recovering from a six-week low recorded earlier in the session. The forex pair ended the week with losses of around 0.4%.

The GBP/USD pair slipped to 1.2704 on Friday, ahead of the Bank of England’s interest rate decision on Thursday.

What to watch: Investors will watch the Federal Reserve’s interest rate decision on Thursday, with markets expecting no change in rates. However, investors will carefully monitor Fed chief Jerome Powell’s comments to get some insights into the timing of rate cuts.

Data on nonfarm payrolls, scheduled for release on Friday, will also remain in focus. The US economy, which added 216,000 jobs in December, is expected to add 173,000 jobs in January.

The markets today

European stocks will be in focus today ahead of some major economic reports this week

Context: European shares recorded gains, settling at a two-year high on Friday, following the European Central Bank’s interest rate decision and economic reports.

Details: European markets remained cautious at the beginning of the year, but strong gains last week sent the regional index to its strongest mark since January 17, 2022.

The European Central Bank kept interest rates unchanged at their record highs last week, in-line with market expectations. The ECB reiterated plans to hold interest rates high for long enough to bring inflation down to the bank’s target level. There are growing speculations of the central bank announcing rate cuts in April or June.

On the economic data front, Germany’s GfK Consumer Climate Indicator declined to -29.7 heading into February, compared to -25.4 in January. The latest reading came in below market estimates of -24.5, signalling the weakest level in eleven months.

However, the European stock indices got a boost from the earnings season. Shares of Remy Cointreau SA gained more than 15% on Friday, after the French beverage maker posted a lower-than-expected decline in sales for the third quarter. LVMH’s shares surged around 13% after the luxury fashion house reported higher quarterly sales.

The STOXX Europe 600 Index gained 1.11% to close at 483.84 on Friday, with most of the sectors closing in the positive zone. Household goods surged 5.2%, while tech stocks fell around 0.7%.

London’s FTSE 100 gained 1.4% to close at 7,635.09 on Friday, surging to a two-week high. UK’s GfK consumer confidence indicator improved to -19 in December, from -22 in the previous month, notching the strongest level since January 2022.

Germany’s DAX 40 jumped 0.32% to 16,961.39, while France’s CAC 40 spiked 2.28% to settle at 7,634.14 on Friday.

What to watch: Investors await the release of economic reports on GDP growth and inflation rate, due this week. The Eurozone economy, which shrank by 0.1% during the third quarter, is expected to contract by 0.1% in the fourth quarter. Analysts expect the Eurozone’s inflation rate to ease to 2.8% year-over-year in January, from 2.9% in December.

Other Markets: US trading indices closed mixed on Friday, with the S&P 500 and Nasdaq 100 down by 0.07% and 0.55%, respectively, and the Dow Jones index up by 0.16%.

The news shaping the markets

NATO chief Jens Stoltenberg said continued military aid from the US to Ukraine carried a key deterrent message for China. The news sent the RUB/USD pair lower in forex trading this morning.


Vietnam’s industrial production surged by 18.3% year-over-year in January, accelerating from a 5.8% jump in the prior month and lending support to the VND/USD forex pair.


The Monetary Authority of Singapore kept its monetary policy setting unchanged during its latest meeting, which sent the SGD/USD pair slightly higher in forex trading this morning.


New Zealand’s trade deficit shrank to $0.323 billion in December, from $0.651 billion in the year-ago month, which lent support to the NZD/USD forex pair.


China’s industrial profits declined 2.3% year-over-year to 7,685.83 billion yuan in 2023, after a 4% contraction in the prior year, which sent the CNY/USD pair lower in forex trading this morning.

What else to watch today

Brazil’s gross debt to GDP and government budget value, US Dallas Fed manufacturing index, Singapore’s monetary policy statement, as well as Central Bank of Brazil’s focus market readout.


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