EUR/USD Displays Volatility in Advent of First ECB Meeting of 2024

Forex

Summary:

Tomorrow marks a poignant day for those observing the European economy as the European Central Bank is scheduled to hold its first monetary policy meeting of this year.

The European Union's central bank has continued to maintain a conservative approach in recent months, rather similar to that of the Bank of England and the Federal Reserve; however, perhaps it could be suggested that the European Central Bank has been a bit less aggressive with its interest rate rises than those of the United Kingdom and the United States over the past two years.

Tomorrow's meeting is being widely anticipated by financial markets participants as the first European Central Bank meeting in which a pause or potential reduction in interest rates could be announced, along with possible timescales relating to any such reduction if such a move is on the table.

Just one day before the meeting takes place, it is clear that some analysts within investment banks and fund managers are considering that the deposit rate will remain at 4.0% within European Union member states, and the general consensus among market participants to hint toward reductions of approximately 50 basis points in June and more than 125 base points during the course of the latter part of 2024.

In this regard, all ears will be focused on tomorrow's meeting.

In terms of currency price movements in the advent of this important economic policy-related event concerning the second most important major currency in the world, there has been a degree of volatility during the early hours of trading today.

It is not necessarily clear as to what has caused this. However, the US dollar's strong position in the light of the stellar performances of the stocks of some major publicly-listed companies included in prestigious indices is one factor alluding to the favourable position of the US economy overall despite the inflation, high interest rates and bank demises that have made high profile news over the past two years.

Therefore, a good US position rather than a weak European position may be a factor. However, there are some industrial concerns relating to potential supply chain issues due to the geopolitical situation in the Red Sea, which has caused many firms to cancel cargo ship operations transporting items through that major shipping route.Indicative pricing only EUR/USD Displays Volatility in Advent of First ECB Meeting of 2024_1

EUR/USD Displays Volatility in Advent of First ECB Meeting of 2024_1

Today, the EURUSD pair began the morning in the European session by trading around the mid-1.08 range, which is quite a difference from the 1.11 mark that the pair traded on December 28. Moving into 2024, the EURUSD has been experiencing an overall downward direction. Therefore, tomorrow's monetary policy meeting may provide further insight and clarity on the euro's medium-term position.

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[Quick Facts]

1. Qatar postponed to Europe to transport LNG due to the Red Sea crisis.

2. UK PMI data suppress rate cut expectations.

3. German business activity deteriorated in January. Manufacturing, services are shrinking.

4. Bank of Canada: interest rates unchanged, inflation outlook remains a concern.

5. U.S. economic growth in January was strong, inflationary pressures fell sharply.

[News Details]

Qatar postpones LNG shipments to Europe due to Red Sea crisis

Qatar, one of the world's largest exporters of LNG, is delaying some shipments to Europe because the Red Sea crisis is forcing longer transportation times. According to traders, Qatar has notified some European buyers of shipment delays and rescheduling. Since Jan 15th, Qatar has detoured at least six European-bound shipments to the Cape of Good Hope in southern Africa instead of the shorter route via the Red Sea and the Suez Canal, ship-tracking data show. Detouring through Africa to Europe adds about two weeks to the schedule, limiting the amount of time available for subsequent shipments.

To date, the gas market has been largely insulated from the disruptions of the Red Sea situation. European gas futures are near six-month lows due to high inventories, strong renewable energy output, subdued industrial demand, and ample supplies of alternative LNG.

UK PMI Data Dampens Rate Cut Expectations

Released on Wednesday, the UK January composite PMI rose to 52.5, the highest in seven months. Besides, the service PMI accelerated again, and ascended to 53.8, an eight-month high, further showing signs of a moderate recovery in the weak economy. In addition, factories are currently being affected by the Red Sea situation, and the manufacturing sector continues to shrink. However, its magnitude has slowed down, and the manufacturing PMI grew from 46.2 to 47.3, the closest level to 50 since last April.

The situation presented by this data is not optimistic. Because of the Red Sea crisis, many cargo ships are detoured to the Cape of Good Hope, so supply delays are exacerbated. The longer the voyage time, the higher the cost of factories, which may result in a rebound in inflation for the manufacturing sector. Furthermore, the service sector price pressures are still high and ultimately may lead to a postponement in rate cuts by the Bank of England.

German Business Activity Deteriorated in January, with Manufacturing and Services Contracting

German PMI data released on Wednesday indicated that the composite PMI (47.1) hit a 3-month low, and the services PMI (47.6) hit a 5-month low, while manufacturing PMI (45.4) hit an 11-month high, all below the breakeven level.

Obviously, the German private sector conditions did not improve in 2024, but continue to slump. Business activity has declined in January for the seventh consecutive month, meaning that the signs of general weakness in demand still exist. In addition, inflationary pressures in the service sector remain high, with activity in the service sector not only declining for the fourth consecutive month, but also accelerating. Meanwhile, the manufacturing sector has also been affected by the Red Sea crisis, and although the degree of weakness has eased, it is still in recession for the nineteenth consecutive month. All indications are that German economic growth is weak.

Bank of Canada: Keep Interest Rates Unchanged, Still Concerned about the Inflation Outlook

On January 24th, the Bank of Canada announced to keep the benchmark interest rate unchanged at the current level of 5%. It is the four consecutive times in the policy meeting to keep interest rates unchanged since last July.

The Monetary Policy Report shows that the Canadian economy has been stagnant since mid-2023, and economic growth in the first quarter of 2024 could be close to zero.

The economy is expected to start growing in the middle of this year and is expected to grow by 0.8% in 2024 and by 2.4% in 2025. Inflation is expected to fall to 3% in the first half of this year, down from 3.4% at the end of last year, and then gradually slow down to return to the target of 2% by 2025.

It's worth noting that the Bank of Canada has given up its previous policy statement that it is "prepared to raise the policy rate further if necessary." However, McCollum said in a later briefing that the Bank of Canada did not rule out the possibility of further rate hikes.

McCollum said the discussion of monetary policy is shifting from whether the policy rate is sufficient to restore price stability to how long they need to maintain the current rate. If new circumstances lead to higher inflation, they may still need to raise rates. If economic developments are broadly in line with the forecasts we released today, he expected future discussions to focus on how long they will keep the policy rate at 5%.

Rising housing and food prices have kept inflation high, and wages are still growing between 4% and 5%. Further declines in inflation are likely to be gradual and uneven, and the Bank of Canada is concerned about the persistence of underlying inflation.

U.S. Economy Grows Significantly in January, and Inflationary Pressures Falls Sharply

From the PMI data, the U.S. economy starts in a satisfying direction in January with business growth accelerating markedly, while inflationary pressures cool sharply. Output of both goods and services has grown at the fastest pace since June last year, with improved demand conditions adding to the growth momentum. New order inflows have now picked up for three consecutive months, helping to boost business confidence for the year ahead to the most optimistic level since May 2022. Selling price inflation is below the pre-pandemic average as prices rose in January at the slowest pace since the outbreak embargo in early 2020. With supply delays intensifying and the labor market remaining tight, cost pressures will need to be watched closely in the months ahead, but for now, the survey sends a clear and welcome message that growth is resilient and inflation has weakened sharply.

[Focus of the Day]

UTC+8 21:15 ECB January Interest Rate Resolution

UTC+8 21:30 U.S. Fourth-quarter GDP

UTC+8 21:45 ECB President Lagarde's Monetary Policy Press Conference

TBD U.S. Treasury Secretary Yellen will speak on the state of the U.S. economy.

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Devin

Economic

Central Bank

The next UK government will inherit the most challenging set of tax and spending problems in 70 years, according to a leading think tank.

The Institute for Fiscal Studies said a combination of high interest costs and feeble growth means the winner of the general election expected later this year will find it "more difficult to reduce debt as a fraction of national income than in any parliament since at least the 1950s."

In a wide-ranging report marking the start of its work in the lead up to the election, the IFS sets out the scale of the challenges most likely facing Keir Starmer, whose opposition Labour Party has held a commanding lead over Prime Minister Rishi Sunak's Conservatives for months.

'Now more than ever, as a country, we face some big decisions and trade-offs over what we want the state to do and how we're going to pay for it," said Paul Johnson, director of the IFS.

Soaring debt and rising interest rates have added about £50 billion (RM301.7 billion) a year to government borrowing costs, stripping public services of much-needed funding and driving the UK tax burden to a postwar high.

To stabilise the debt, which has soared from 50% of GDP to almost 100% of GDP in the last 15 years, the government will need to raise more tax than it spends on everything other than debt interest from now onwards, the IFS said. The last time the UK ran a so-called "primary surplus" was in 2002.

Both the Tories' and Labour's fiscal plans commit them to "substantial primary surpluses," according to the IFS.

The government is under pressure to publish detailed spending plans beyond 2025 as it prepares for a March budget at which Chancellor Jeremy Hunt has said he wants to cut taxes. Earlier this week, Richard Hughes, chair of the budget watchdog, accused ministers of producing forecasts that are worse than a work of fiction due to the lack of detail.

Johnson said: "Those looking to form the next government should be honest about these trade-offs. If they are promising tax cuts, let's hear where the spending cuts will fall. If they are going to raise, or even protect, spending, they should tell us where taxes will rise."

"Parties might think that further increases in government debt are justified: in which case they should make the argument for why debt should be rising."

Labour has pledged to borrow £28 billion a year for green investment by 2030 but Tory officials claim the plan would require tax rises or the debt burden will spiral upwards.

Johnson said there were no easy options. Taxes are at record levels and "most public services other than health" are facing another round of austerity in real-terms cuts.

Public investment is on track to fall by 0.8% of GDP by 2029, and even with Labour's green spending it will be lower at the end of the next parliamentary-term than today. The annual state pension costs £153 billion and working-age benefits another £124 billion but "the generosity of many benefits has already been cut."

One target could be health-related benefits. "Spending on disability benefits is rising incredibly fast as claimant numbers soar. This needs urgent attention, but previous efforts to rein in spending have struggled to achieve their objectives," the IFS said.

Source: Bloomberg

To stay updated on all economic events of today, please check out our economic calendar

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Thomas

Economic

Stocks

The focus for Asian markets on Thursday will be on whether the improvement in investor sentiment toward China and Hong Kong continues, following the Chinese central bank's latest move to inject liquidity and support asset prices.

The regional economic data calendar is light and will be dominated by the first estimate of South Korea's fourth quarter gross domestic product growth, ahead of which the Korean won just chalked up its biggest rise against the dollar in a month.

The dollar is trading softer across the board, weighed down by lower U.S. bond yields and a rebound in market expectations that the Fed could cut interest rates as early as March.

That alone should help whet investors' risk appetite in Asia on Thursday, as should the rally in China and Hong Kong on Wednesday that was sparked by the People's Bank of China decision to slash bank reserves by the most in two years.

The move, which will inject about $140 billion of cash into the banking system, and PBOC Governor Pan Gongsheng's pledge to unveil policies on improving commercial property loans extended this week's bounce in risk assets and the yuan.

The Shanghai Composite's 1.8% rise was its biggest since July, the CSI 300 index of blue chip shares is now poised to snap a three-week losing streak, and the Hang Seng jumped 3.6%.

Beijing's actions on Wednesday came hot on the heels of a Bloomberg News report that authorities are weighing up a 2-trillion yuan ($278 billion) funding package of measures to support the country's creaking markets.

And with strong U.S. earnings reports, especially from Netflix, and rising chipmaker stocks lifting the S&P 500 to yet another record high, the mood at the open in Asia on Thursday should be bullish. China Optimism Spreads, S Korea GDP in Focus_1

China Optimism Spreads, S Korea GDP in Focus_1

China Optimism Spreads, S Korea GDP in Focus_2

Official figures from Seoul, meanwhile, are expected to show that South Korean growth slowed in the final three months of 2023 to a seasonally adjusted 0.5% quarter-on-quarter pace, according to a Reuters poll of economists, down a touch from 0.6% in the previous quarter.

Year-on-year growth, however, is expected to have accelerated to 2.1% in the fourth quarter from 1.4% in the preceding quarter.

The benchmark KOSPI index has had very weak start to 2024, and is down 7% so far this year. For comparison, the MSCI Asia ex-Japan index is down 4.5% slide, China's CSI 300 index was outperforming that even before this week's stimulus, and Japan's Nikkei is up 8%.

Here are key developments that could provide more direction to markets on Thursday:

- South Korea GDP (Q4 advance estimate)

- Hong Kong trade (December)

- Bank of Korea manufacturing survey (February)

Source: Reuters

To stay updated on all economic events of today, please check out our economic calendar

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Damon

The macroeconomic context of the election

On January 15, local time, the results of the 2024 presidential election primary in Iowa, the United States, were released. This is the first party primary of the Republican Party, and Trump won the first battle by an overwhelming majority. The start of the Republican primary election also marks the official opening of the new US presidential election. The current U.S. presidential election will run over 294 days, starting in the Iowa primary on January 15 and ending on Election Day on November 5. There are several ways to predict elections, and macroeconomic performance has always been a strong predictor of election outcomes. In the current election cycle, macroeconomic performance favors Biden to a greater extent than political polls would suggest. It should be noted that most of these indicators are measured in terms of actual data (adjusted) to assess the current state of the economy. Therefore, the high inflation of 2021-2023 had a negative impact on these data. However, as the disinflation process has progressed, these data points have improved.

Preview of the 2024 U.S. Presidential Election_1

The president's approval rating is not only tied to the economy

Among these figures, the Presidential Approval Rating is one of the longest standardized polls in the world's history, and it is a trusted indicator of public opinion. According to indicators, the approval rating of Biden is lower than that of any re-elected president, and it is also lower than that of former President Donald John Trump during the same period in the first administration.

The Republican Party's continued resistance to the legitimacy of the 2020 election has caught the attention of some neutral voters. A June 2022 decision by the Supreme Court could increase voter turnout in the 2022 midterm elections: allowing state governments to issue regulations banning abortion. As a result, the Democratic candidate has a significant lead in the election relative to President Biden's razor-thin approval ratings.

Preview of the 2024 U.S. Presidential Election_2

The U.S. election in the historical context

The current political climate has made the federal electoral system even more volatile. In highly polarized societies, power shifts occur frequently because of the decrease in the number of voters in elections. This trend is evident when a 10-year moving average is used to measure national participation at the party level, as well as a party's control of Congress or the White House. For example, during the Cold War, the U.S. political system was very stable, and there were few power shifts except for a change in the president's party. But in 1990 that began to change. And in recent years, control has fallen to an all-time low, so much so that a political party has the same odds of retaining control of Congress as a coin toss.

Preview of the 2024 U.S. Presidential Election_3

In short, the last decade has been the first time since the beginning of the 20th century that there has been a change of power every two years. Currently, there is a good chance that the Republican Party will regain the US Senate in 2024. This pattern is likely to continue.

The U.S. presidential election will have unprecedented global implications

One thing we need to understand is that if the macroeconomic and geopolitical environment is more stable, then increased political turmoil will not have a big impact on the market. But for now, the government elected in 2024 could inherit a world of geopolitical conflicts, ongoing trade conflicts, national security concerns, and revolutionary technological innovations. Increased political polarization can have a significant impact on policy outcomes, leading to frequent power shifts and large policy fluctuations. This is the main reason why financial markets are paying more attention to the U.S. election than they have in decades. The U.S. election did have a huge impact on the macro economy and markets.

In this regard, foreign policy will also be more relevant to markets than ever before, given the impact on the credibility of the U.S. alliance system. A return to the White House for Trump would mean higher fiscal spending and security costs for Europe and other allies. Moreover, the fiscal trajectory of the United States itself is on the ballot, although this is determined by the distribution of power between Congress and the president. And since 2017, most of the widening of the fiscal deficit has occurred during the one-party administration in Washington or during the critical phase of the pandemic.

From then on, the current political structure will shift towards a budget struggle and may begin a modest fiscal consolidation. But fiscal expansion is likely to be back on the agenda, depending on the composition of the executive and legislative branches after the election.

Finally, recent administrations have used executive power and rulemaking to circumvent the legislative process or to support major policies. While these executive orders face serious political and legal challenges, they can also have a huge impact on the nature and quality of decision-making across the government. The same applies to the Fed's governance, which affects the heart of U.S. economic policymaking.

Impact on investments

Perhaps the most immediate impact of an election year is the budgeting process between Republican House and Democratic presidents, which means fiscal policy will tighten slightly in 2024. The Fed is expected to start cutting interest rates in the spring, the main reason for which is deflation, but it will also be affected by election dynamics, which means that the dollar will be slightly weaker than last year.

For the U.S. stock market, the average annual return in an election year is likely to be 6.8%, down from the average of 8.8% after 1948. Given that the market rally in late 2023 has already paid off many benefits, and economic growth is expected to be slightly weaker this year, this is also a reasonable outcome for 2024 annual returns.

It's important to note that this election season is likely to be spectacular, with markets likely to have a “bumpy ride” both before and after Election Day.

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Economic

US Q4 GDP growth rate numbers on deck. On the corporate front, look out for earnings from Intel and American Airlines.

German business confidence data

Germany is set to release business morale data, and the European Central Bank's interest rate decision is also expected. Meanwhile, in the US, attention is on the GDP growth rate for Q4 and other important economic indicators. In the UK, earnings reports from companies in the health and tech sectors like Intel will be closely watched.

In Germany, there will be new data on business confidence. This is important because it can give us an idea of how optimistic or pessimistic German businesses are about the future. The previous month's reading was a bit low, but experts think this month's reading might be a little higher.

ECB to decide on interest rates

The European Central Bank will also make a decision on interest rates. Basically, they will announce if they plan to change the cost of borrowing money. Experts don't expect any changes this time, but if they are worried about inflation - the rate at which prices are rising - they might make a move that affects the value of the euro compared to other currencies.

In the US, we're going to find out how much the economy grew in the last quarter of the year. This is important because it tells us how well the US is doing financially. There will also be updates on things like how many new homes were sold and how many people made jobless claims. All of these data points can affect the value of the US dollar.

UK big companies' earnings reports

In the UK, the focus is on earnings reports from some big companies. For example, Intel, a tech company, will be making important announcements about its products and plans. This could have an impact on its competition with other companies in the automotive sector. We'll also be looking closely at American Airlines' earnings report, to see how they've been affected by issues with Boeing planes.

To stay updated on all economic events of today, please check out our economic calendar

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Chandan Gupta

Traders' Opinions

Commodity

Economic

Fundamental Analysis

Gold futures (XAU/USD) find themselves at a crossroads, wrestling with uncertainty as investors brace for pivotal economic data releases and contemplate the direction of the US central bank's policy.

The precious metal, often seen as a safe-haven asset, has faced a challenging start to the year, struggling to build upon the momentum it enjoyed at the close of 2023. Market observers now eagerly await to see if gold can stand its ground at the $2,000 mark.

At the time of this analysis, the gold price (XAU/USD) hovers around $2,030, with the week's highest reaching the resistance level of $2,038 . Despite this, the overall trend paints a different picture, revealing a decline of approximately 1% over the past week and a more substantial 2% dip since the start of 2024. In a contrasting move, silver prices, gold's sibling in the metals market, have managed to breach the $22 level . However, even silver has faced headwinds, experiencing a 4% drop in the past week and a more substantial 6.5% decline since the dawn of the new year.

The metal markets are in keen anticipation as they prepare to digest significant economic data during the week, notably the release of the fourth-quarter US Gross Domestic Product (GDP) report on Thursday. The GDP growth estimate, as indicated by the Federal Reserve Bank of Atlanta's GDPNow model and the New York Federal Reserve's Nowcast model, stands at approximately 2.4%. This economic landscape, characterized by flexibility, could potentially provide the Federal Reserve with more room to keep US interest rates elevated for an extended period.

Recent shifts in investor expectations add an interesting layer to the narrative. According to the CME FedWatch tool, the futures market no longer foresees interest rate cuts at the Federal Open Market Committee (FOMC) meetings in January or March. Most markets are now looking towards a quarter-point drop in the benchmark federal funds rate in May. This adjustment has had a ripple effect, bolstering the US Treasury bond market and strengthening the US dollar.

The US Dollar Index (DXY), a measure of the dollar against a basket of major currencies, has seen a rise to 103.70 from its opening at 103.33. This uptick in the dollar's strength, however, may present a challenge for gold. Traditionally, a stronger dollar tends to be bearish for US dollar-denominated commodities like gold, making them relatively more expensive for foreign investors.

The performance of the dollar is not the only factor influencing the gold market. Treasury markets have seen an upward trajectory, with the ten-year bond yield climbing by five basis points to 4.145%. Concurrently, the yield on two-year bonds rose by 2.4 basis points to 4.4%, and the yield on 30-year bonds increased by 6.5 basis points to 4.381%. This movement is crucial for gold, given its sensitivity to interest rate fluctuations – a critical factor affecting the opportunity cost of holding non-yielding bullion.

In summary, the gold market is in the throes of a dynamic interplay between economic data, central bank policy, and market sentiment. As investors grapple with shifting expectations and external factors, the fate of gold hangs in the balance, with each market development leaving its imprint on the precious metal's journey in the complex world of financial markets.

Technical Analysis

The daily chart for Gold XAU/USD indicates a neutral stance with a slight upward inclination. Global geopolitical tensions and increased central bank gold purchases support this balance. Consider any dip in prices as a potential re-entry opportunity. Key support levels are $2010 and $1985, while potential bullish thresholds are $2055 and $2070.

Approach market fluctuations strategically, viewing downturns as chances to reassess and re-enter. Gold's sensitivity to global events makes it a dynamic asset, requiring a watchful eye on critical support and resistance levels. In conclusion, the nuanced perspective suggests caution and strategic thinking amid geopolitical factors, presenting opportunities in market fluctuations. Pinpointing Optimal Buying Opportunities for XAU/USD_1

Pinpointing Optimal Buying Opportunities for XAU/USD_1

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EUR/USD Displays Volatility in Advent of First ECB Meeting of 2024

January 25th Financial News

[Quick Facts]

[News Details]

[Focus of the Day]

Next UK Govt Faces Worst Fiscal Inheritance in 70 Years

Source: Bloomberg

China Optimism Spreads, S Korea GDP in Focus

Source: Reuters

Preview of the 2024 U.S. Presidential Election

The macroeconomic context of the election

The U.S. election in the historical context

The U.S. presidential election will have unprecedented global implications

Impact on investments

ECB Rate Decision; Q4 GDP Growth Rate; Intel; American Airlines

Pinpointing Optimal Buying Opportunities for XAU/USD

Fundamental Analysis

Technical Analysis

Risk Disclosure