Pound-Dollar Outlook: Anticipating Further Decline

Traders' Opinions

Economic

Summary:

Despite a strong start for the British Pound against the U.S. Dollar in 2024, financial analysts, including myself, project a continued slide for the Pound. Both currencies are leading the G10 complex, thanks to revised expectations for rate cuts by the Bank of England and the U.S. Federal Reserve.

Assessing the landscape, it's clear that the Pound and the U.S. Dollar are currently at the forefront of the G10 complex. However, my analysis indicates that despite the Pound's promising start to 2024, we should brace for a sustained downward trajectory against the U.S. Dollar. This caution is rooted in the recalibrated expectations surrounding rate cuts from both the Bank of England and the U.S. Federal Reserve in the coming months.

Pound-Dollar Outlook: Anticipating Further Decline_1

The Pound-to-Dollar exchange rate has already experienced a 0.40% dip for the year, settling at 1.2683. Even though the Pound has shown resilience against other G10 currencies, indicating its outperformance during the Dollar's recent decline, I advise a cautious approach as this resilience might not last.

One factor contributing to the Pound's strength has been the shift in short-term yields, particularly the widening 2-year yield gap between the U.S. and the UK since the year began. This has provided support for Sterling amid the Dollar's slump.

Pound-Dollar Outlook: Anticipating Further Decline_2

However, theres a potential reversal in Pound-Dollar dynamics as short-term Gilt yields are expected to decrease. I'm projecting that the Pound will likely end 2024 at the bottom of the G10 pile, experiencing a more significant fall against the Dollar compared to other G10 currencies. This projection is based on my analysis of the evolving monetary policies in the UK and the U.S.

My anticipation is that UK inflation will hit the central bank's target ahead of other major developed economies, possibly prompting a rate cut by the Bank of England as early as June. The recent revision in inflation forecasts for 2024, with expectations of reaching the Bank of England's 2.0% target by April, sets the stage for a potential downward adjustment in interest rates.

The Bank Rate is expected to fall to 3% by the end of the easing cycle, a figure lower than what investors are currently discounting. Consequently, I foresee a substantial rerating lower for the Pound, aligning with evolving interest rate expectations.

On the flip side, market expectations for the U.S. policy rate are consistent with my forecasts, suggesting a shift in the short-term yield gap in favor of the Dollar. Additionally,the Pound is currently overvalued, leaving room for a significant decline.

While the Pound currently enjoys a robust position, my analysis suggests that the evolving monetary policies and inflation forecasts in the UK and the U.S. will likely lead to a depreciation of the Pound against the U.S. Dollar throughout 2024.

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

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Zi Cheng

Traders' Opinions

Cryptocurrency

Do Kwon's digital-asset enterprise, Terraform Labs Pte., which he co-founded, has initiated Chapter 11 bankruptcy proceedings in the United States. According to court documents filed in Delaware on Sunday, the company's estimated assets and liabilities fall within the $100 million to $500 million range, with the number of creditors ranging from 100 to 199.

Following the 2022 collapse of the TerraUSD stablecoin and Luna token, resulting in losses of at least $40 billion and contributing to a $2 trillion cryptocurrency market downturn, Kwon is sought by both South Korea and the US. Currently in custody in Montenegro for traveling with a fake passport, Kwon may face extradition to the US by mid-March on charges of orchestrating a significant fraud, as indicated by his lawyer earlier this month.

Source: Raconteur

In the court documents, Kwon is identified as the majority shareholder, owning 92% of Terraform Labs, while the remaining portion is owned by another South Korean entrepreneur, Daniel Shin.

Despite facing fraud charges and a lawsuit by the Securities and Exchange Commission (SEC), Terraform Labs CEO Chris Amani emphasized the resilience of the Terra community, stating that the bankruptcy action is necessary to address legal challenges and pursue collective goals.

Terraform Labs' Chief Executive, Mr. Chris Amani, expressed, "In the face of challenges, the Terra community and ecosystem have demonstrated remarkable resilience. Taking this action is essential to enable us to persist in our pursuit of collective goals while addressing the legal challenges that still need resolution."

The SEC asserts that between April 2018 and the collapse of the scheme in May 2022, Terraform Labs and Do Kwon garnered billions of dollars from investors through the offering and sale of a networked array of crypto asset securities, with many transactions being unregistered.

The downfall of TerraUSD and Luna had a domino effect, leading to the decline of numerous cryptocurrency firms, including well-known entities like hedge fund Three Arrows Capital, Singaporean lender Hodlnaut, brokerage Voyager Digital, and lender Celsius Network.

Ultimately, the crash of TerraUSD and Luna precipitated a widespread cryptocurrency winter or a protracted market sell-off that persisted throughout much of 2023.

In addition to the SEC lawsuit, which resulted in a ruling by US District Judge Jed S. Rakoff holding Terraform Labs liable for selling unregistered securities, Kwon and the company are also indicted on fraud charges. The judge dismissed allegations that the company engaged in transactions involving unregistered security-based swaps, stipulating that the SEC's fraud case against Terraform must be tried by a jury.

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Devin

Economic

Central Bank

Forex

Asian markets highlights sharp divergence in trends today. Nikkei surged to new 34-year high, buoyed by last week's record closes in US and bolstered by expectations that BoJ will maintain its negative interest rate policy in the this week's meeting. Japanese stock market is also riding on the optimism that BoJ is not in a rush to tighten its monetary policy, with the earliest rate hike not expected until April. However, this April decision on rate hikes will still hinge on new economic projections due tomorrow and the results of upcoming spring wage negotiations.

In stark contrast, stocks in Hong Kong and China extended their downtrend, with significant plunges of more than -2% and -1%, respectively. Investors in these markets are showing dissatisfaction with the Chinese government's lack of substantial stimulus to boost the sluggish economy and counter deflationary pressures. Additionally, there appears to be an emerging sentiment among heavyweight investors favoring investment "anywhere-but-China."

In the currency markets, most major pairs and crosses are currently trading within Friday's range. Australian Dollar is leading the decline among commodity currencies, while Swiss Franc is also under pressure. Sterling stands out as the strongest at this point, followed closely by Yen and Euro, with Dollar showing mixed performance. Trading might remain subdued today due to a near-empty economic calendar, but several important events loom on the horizon. These include BoJ, BoC, and ECB meetings, as well as crucial economic data like US GDP and PCE inflation, in addition to global PMI data.

Technically, GBP/USD's rebound from 1.2595 is picking up some momentum today. It's plausible that consolidation pattern from 1.2826 has completed with three waves down to 1.2595. Firm break of 1.2784 will argue that larger up trend is ready to resume through 1.2826 high. This is a development to watch in the next two to three days, with UK PMIs on Wednesday a possible trigger. Contrasting Trends in Asia; BoJ, BoC and ECB to Highlight a Busy Week_1

Contrasting Trends in Asia; BoJ, BoC and ECB to Highlight a Busy Week_1

In Asia, at the time of writing, Nikkei is up 1.59%. Hong Kong HSI is down -2.30%. China Shanghai SSE is down -1.34%. Singapore Strait Times is up 0.20%. Japan 10-year JGB yield is down -0.0107 at 0.658.

PBoC holds 1-yr and 5-yr LPR steady

People's Bank of China announced today that it would maintain one-year loan prime rate at 3.45%, a level unchanged since August last year. Similarly, five-year rate, critical for mortgage financing, remains steady at 4.2%, consistent since its last reduction in June. This decision follows PBoC's unexpected move last week to keep its medium-term lending facility rate stable.

PBoC's decision to hold rates steady comes amid a sluggish economic environment in China, coupled with increasing deflationary pressures. Despite these challenges, the central bank appears reluctant to employ interest rate reductions as a tool to stimulate the economy, primarily due to concerns over the depreciating Yuan. PBoC might continue to avoid further rate cuts until Yuan regains some stability, to prevent exacerbating the currency's depreciation.

USD/CNH's break of 55 D EMA last week suggests that the corrective pull back from 7.3679 has completed at 7.0870 already. That came after drawing support from 38.2% retracement of 6.6971 to 7.3679 at 7.1117. Further rise is now mildly in favor as long as 7.1589 minor support holds, back to retest 7.3679 high. Contrasting Trends in Asia; BoJ, BoC and ECB to Highlight a Busy Week_2

Contrasting Trends in Asia; BoJ, BoC and ECB to Highlight a Busy Week_2

BoJ, BoC and ECB to stand pat; Lots of top tier data too

BoJ, BoC and ECB are all expected to keep monetary policy unchanged this week. It's unlikely for BoJ Governor Kazuo Ueda to drop any hints on negative interest rate exit for now. Ueda would reserve that card for March meeting, if BoJ is to raise interest rate eventually in April. Yet, some subtle hints could be seen in the new quarterly economic projections. There were reports about BoJ lowering core inflation forecast of fiscal 2024 due to falling oil prices. But instead, the key is on the inflation forecast through fiscal 2026. The chance of a hike could increase notably if BoJ sees core inflation staying around 2% target through this horizon.

As for BoC, attention will be on how much longer will it keep interest rate at current level of 5.00%. The central bank will likely push back against the idea that rate cuts are coming soon, emphasizing that inflation remains sticky. A recent Reuters poll indicated mixed expectations: while 22 of 34 respondents anticipated rate cuts to commence in June or later, 12 predicted an initial cut in April. The survey's median suggests a cumulative 100 basis points reduction in rates to 4.00% this year..

ECB's communications are not expected to deviate from the chorus of comments out of Davos last week. President Christine Lagarde would continue to push back on speculation of an early rate cut. The question is whether should would explicitly noted summer is the likely timing for the start of policy loosening. March is the more likely meeting for any substantial shift in tone, given that new economic projections will then be available. A Reuters poll showed a divide in expectations: 55% of respondents predicted no easing until at least the second half of the year, while a significant minority of 45% anticipated a reduction in borrowing costs as early as June.

In terms of economic data, US Q4 GDP and December PCE inflation will be major focal points for the Dollar. Other data with the potential to impact respective currencies include Germany's Ifo business climate, New Zealand's CPI, and Japan's Tokyo CPI. Additionally, PMI data from US, Eurozone, UK, Japan, and Australia will be closely scrutinized for insights into global economic health and potential market movements.

Here are some highlights for the week:

Monday: US leading index.
Tuesday: New Zealand BNZ services; Australia NAB business confidence; BoJ rate decision; UK public sector net borrowing; Canada new housing price index; Eurozone consumer confidence.
Wednesday: New Zealand CPI; Australia PMIs; Japan trade balance, PMI manufacturing; Eurozone PMIs; UK PMIs; BoC rate decision; US PMIs.<
Thursday: Germany Ifo business climate; ECB rate decision; US GDP, jobless claims, durable goods orders, trade balance, new homes sales.
Friday: Japan Tokyo CPI, SPPI, BoJ minutes; UK Gfk consumer sentiment; Germany Gfk consumer sentiment; Eurozone M3 money supply; US personal income and spending, PCE inflation, pending home sales.

AUD/USD Daily Report

Intraday bias in AUD/USD remains neutral at this point. Some more consolidations could be seen above 0.6524 temporary low. But further decline is expected as long as 0.6639 support turned resistance holds. Firm break of 0.6524 support will argue that whole rebound from 0.6269 has completed, and bring deeper fall to this support. Contrasting Trends in Asia; BoJ, BoC and ECB to Highlight a Busy Week_3

Contrasting Trends in Asia; BoJ, BoC and ECB to Highlight a Busy Week_3

In the bigger picture, price actions from 0.6169 (2022 low) are seen as a medium-term corrective pattern to the down trend from 0.8006 (2021 high). Sideway trading could continue in range of 0.6169/7156 for some more time. But as long as 0.7156 holds, an eventual downside breakout would be mildly in favor. Contrasting Trends in Asia; BoJ, BoC and ECB to Highlight a Busy Week_4

Contrasting Trends in Asia; BoJ, BoC and ECB to Highlight a Busy Week_4

Source: ActionForex

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

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FastBull Featured

Remarks of Officials

San Francisco Federal Reserve Bank President Mary C. Daly spoke at an economic roundtable on January 19, with the key points as follows.

The U.S. economy and monetary policy both are in a "good place", and the risks have grown more balanced while there is still work to do to bring down inflation. We have to calibrate very carefully to ensure that we continue to bring inflation down.

It is premature to think interest-rate cuts are around the corner. He said he has neither evidence that inflation is continuing to fall nor any early signs that the job market is starting to weaken, both of which lead him to believe that a policy adjustment is not necessary for the time being.

Unlike last year's focus on fighting inflation, this year, it is more important to pay attention to the Fed's other mission, which is to maximize employment.

In recent trading days, Fed officials have continued to dampen market expectations. They emphasized that the upcoming data would guide them to decide when to cut interest rates, and made it clear that they had not yet seen enough evidence to start cutting rates. They achieved some results with the support of some data - that traders expected only five rate cuts by the Fed this year, down from six, and the probability of the first rate cut in March fell to 48%. Just a week ago, the market almost fully priced in a Fed rate cut in March.

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Cohen

Economic

Political

Cui bono? Who benefits from the current threat to shipping in the southern Red Sea and Gulf of Aden?

The Houthi forces claim to be defenders of the Palestinian cause. Iran needs to show it is doing something to stand up to Israel and demonstrate some retaliatory power after the assassinations of its operatives. But some less obvious players gain too.

The missiles, drones and small boat attacks have deterred the majority of container traffic. Now bulk carriers, and tankers of oil and liquefied natural gas, are increasingly steering clear of the area, with overall traffic down more than 40 per cent. Consumers suffer from delays and higher costs as insurance bills go up and ships are rerouted around Africa.

The strikes pose serious problems for littoral states. Saudi Arabia has kept its own tanker fleet moving, apparently feeling the risks for now are manageable, but some third-party shippers it uses have pulled out. Its crucial Red Sea ports face significant risks if they want to receive cargo from the south or send it to Asia.

This is troublesome for Yanbu and Rabigh, whose petrochemical industries are mostly focused on exporting to Asia, and for Jizan, whose major new refinery needs to receive crude feedstock from Saudi Arabia’s Gulf ports. Power and desalination plants along the coast need to get fuel, although they could pick up foreign fuel oil cargoes, for instance from Russia.

The East-West pipeline, with its terminus at Yanbu, is mostly used to send cargo to Europe. It does provide Saudi Arabia with a crucial alternative outlet for crude if exports through the Gulf are impeded. But in that case, shipments would either have to head north or through the Bab Al Mandeb.

Egypt was already suffering an economic crisis. Container traffic through the Red Sea has almost ceased, and a drying up of oil and LNG tanker movements would further hit earnings from the Suez Canal. In its last financial year, Cairo earned $9.45 billion from the canal, almost a seventh of government revenue.

Since 2022, Europe has largely managed to replace Russian gas with imports of LNG, mainly from the US and Qatar. QatarEnergy has begun diverting its LNG vessels around Africa.

Fortunately for Europe, the current cold snap has been just a blip in an overall warm winter with ample gas storage and moderate prices. European gas prices have hardly responded to the trouble. But the continent should learn from 2022’s agonising crisis – its safety margin is increasingly thin. A big LNG surplus is on the way from 2026 and 2027 onwards, but only if there are no problems with Doha’s exports and its major LNG expansion projects.

The current Israeli government benefits from a sense of threat and chaos, inclining the US and Europe to keep backing it unquestioningly. Most of Israel’s modest oil needs come from its own output or suppliers to the Mediterranean such as Kazakhstan and Azerbaijan.

Further investment in its own offshore gas industry is hampered by a sense of insecurity and risk, and from unwillingness to depend much more on Egypt, which effectively re-exports some Israeli gas via underutilised liquefaction plants. But, if the disruption persists, Cairo and Brussels may see the value in more adjacent gas output.

From Tehran’s point of view, the current situation is ideal. Although it backs the Houthis, they also make their own decisions, so attacks launched from Yemen are at least one step removed. Iran gives a show of defiance, causes trouble for the US and distracts its regional adversaries, without being so provocative as to attract a direct assault on itself.

Except in extremis, Iran does not want to close the Strait of Hormuz or the Gulf, since virtually all its rebounding oil exports go to China. Stirring up trouble in the Red Sea is much more palatable. The boarding of a tanker in the Gulf of Oman on January 11 by the Iranian navy was probably a one-off since the same vessel had been seized by the US last year over allegations of transporting Iranian oil.

Meanwhile, Russia's tankers have also mostly continued sailing south through the Red Sea to their vital markets of India and China. Though two Russian-linked ships were attacked in December and on January 12, they were not damaged and these were probably mistakes or misidentifications. Constraining Europe’s gas supplies has not brought Moscow strategic gains yet, but might eventually.

Source: The National News

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CMC

Economic

Forex

In what has been a choppy start to the year for European markets we've seen the FTSE100 fall for 3 weeks in a row, while in the rest of Europe we've also had a predominantly negative bias, with the Stoxx 600 down by 2%.

This negativity has come against a backdrop of central bankers pushing back on market expectations of early rate cuts, as investors recalibrate the timings of when to expect a change of policy and the start of a possible rate cut cycle.

While European stocks have struggled because of this pushback, US markets have merely shrugged with the S&P500 becoming the latest US market to take out its 2022 highs to close at a fresh record high last week.

Having rallied into the end of last year, markets in the US have picked where they left off, with new record highs for all three major indices, led by the Nasdaq 100 which is up by 2.9% year to date, due to further gains from the Magnificent 7, led by Nvidia which is up 20% since the start of the year. along with AMD which has added 18%.

Friday's record finish in the US looks set to see markets in Europe open higher this morning, despite Asia markets getting off to a mixed start as the Nikkei 225 sets fresh 34-year highs, while Chinese markets can't seem to buy a bid, after Chinese loan rates were kept unchanged.

The current divergence between US and European markets is probably down to the belief that the US economy is in much better shape than its European counterparts, a belief that is likely to be reinforced further this week by the latest US Q4 GDP numbers, ahead of next week's Fed meeting.

Before we get to that however last week's pushback from European Central Bank policymakers on an imminent rate cut makes this week's meeting of the governing council and policy decision that much more important in signalling intentions about the possible timing of when to consider the prospect of a rate cut which some in the market think is due.

With a lot of the European economy struggling with weak demand, as well as an economy that has seen precious little growth since Q3 of 2022 the calls for the ECB to consider a modest easing of policy have been growing louder.

This market pricing prompted the likes of the Bundesbank's Joachim Nagel, Austria's Robert Holzmann and ECB President Christine Lagarde to all push back on the idea of an early rate cut last week, although Lagarde did hold open the possibility of a summer rate cut as she looked to keep the doves onside.

This week the ECB could outline its thinking on how it sees the economy evolving as well as the possible timeline for when we can hope to see some policy change. Markets currently have the ECB cutting rates 4 times this year in increments of 25bps starting in June, although this could come earlier if the economic data deteriorates further.

We also get to hear from the Bank of Japan this week, with the Japanese yen being the worst performer this year, as well as last week, due to expectations of a change in policy being dialled back due to an easing of price pressures, after a sharp slowdown in cash earnings in November.

EUR/USD – found support at the 200-day SMA at 1.0840 last week. A break below here and the 1.0800 level targets the 1.0720 area. The main resistance remains at 1.1000.

GBP/USD – continues to find support just above the 50-day SMA and 1.2590 area, which is keeping the upside potential intact. We need to get above 1.2800 to maintain upside momentum. Also have support at the 200-day SMA at 1.2550.

EUR/GBP – has found support at the 0.8550 level over the last 2-months. A fall through here could see further falls towards the 0.8520 area. We still have resistance at the 0.8620/25 area and the highs last week.

USD/JPY – continues to edge towards the 150.00 level. Pullbacks likely to find support at the 146.25 level cloud support as well as the 50-day SMA.

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

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Stocks

Better data where it matters, investors still euphoric on tech

Last week saw several key data releases, with preliminary figures from the University of Michigan (UoM) indicating a significant jump in consumer sentiment from 69.7 to 78.8. Additionally, consumer inflation expectations decreased to 2.9% for the 12-month outlook and slightly dropped to 2.8% for the five-year forecast. Despite these positive indicators, existing home sales for December were disappointing. However, building permits and housing starts outperformed forecasts, although the latter experienced contraction.

Key US stock indices, including the S&P 500 and the tech-heavy Nasdaq 100, rebounded from intraweek lows to reach fresh record highs, buoyed by updates in the technology sector.

Yields up, rate cut likelihoods drop

The bond market saw week-on-week strength in Treasury yields, although there were challenges in sustaining higher yields in real terms. Comments from the Federal Reserve's Mary Daly indicated that significant work remains to reduce inflation to the central bank's 2% target. Daly remarked it is “premature to think” that rate cuts are imminent. Similarly, Raphael Bostic required “very convincing” evidence to support normalization before the third quarter. Market pricing now suggests a fifty-fifty chance of a rate cut in March, with little likelihood of rates dropping below 3.75-4% by year-end. The US has avoided a government shutdown, with the latest stopgap bill extending the deadline to March.

Week ahead – PMIs, GDP, pricing, and earnings

The upcoming week in the US starts quietly, with low-impact data expected, including the Richmond Fed's manufacturing index. However, things will intensify with the release of preliminary PMIs (Purchasing Managers' Index) from S&P Global on Wednesday.

Thursday will see a flurry of significant data releases, including Advance GDP (Gross Domestic Product) for the fourth quarter, anticipated to show growth (Atlanta Fed's GDPNow estimate at 2.4%). Additionally, durable goods orders for December and weekly claims will be closely watched.

Pricing remains a key focus, especially following a hotter-than-expected Consumer Price Index (CPI). The Personal Consumption Expenditures (PCE) price index for December is expected to remain steady at 2.6% year-on-year (y/y) for the headline figure, with a modest increase of 0.2% month-on-month (m/m). The core index is predicted to drop to 3% y/y and rise by 0.2% m/m. Significant earnings are on the horizon, with Procter & Gamble and Johnson & Johnson (both Dow 30 components) reporting on Tuesday, followed by Netflix, and Tesla on Wednesday.

Dow technical analysis, overview, strategies, and levels

The Dow Jones Industrial Average experienced higher highs and a higher close. The weekly timeframe and intraweek movements showed limited opportunities for conformist and contrarian strategies, with lows above its previous first Support and highs below its first Resistance. All key technical indicators remain positive/bullish, maintaining a ‘bull average' overview.

On the daily timeframe, Friday's significant movements showcased more substantial implications. The short-term technical indicators, which were not neutral, turned entirely green by the close. The index's movements surpassed Thursday's first and second Resistance levels. As a result, conformist buy-breakout strategies were particularly successful, in line with the bullish technical overview. Dow 30: Gains But Fails to Outperform as Tech Takes the Attention_1