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Rollercoaster in FX markets offers little sense of direction

FX markets saw the USD under pressure during last week. But yet again, the likes of the GBP, EUR and JPY failed to capitalise on its weakness, which appears to be induced by intensified speculation around the timing and scale of US interest rate cuts in 2024 and beyond. The US economy still looks to be the strongest performer of these four economies, and yet the markets continue to believe that interest rate cuts will be deepest from the US in 2024. The Euroland interest rate cuts are expected to be the next largest, with the Bank of England predicted to do the least by interest rate markets.

The trading range that is still occurring seems to be between $1.2610 and 1.2790 in GBPUSD, between $1.0870 and 1.1060 in EURUSD and between ¥140.90 and 146.40 in USDJPY. I don’t think we’ll see those ranges being broken this week, with conflicting forces at work between geopolitics and macroeconomic indicators.

The additional US air strikes on Houthi rebel targets in Yemen made by the US over the weekend, and the downing of a cruise missile fired from the Houthi region towards a US Navy destroyer, does not indicate a reduction in Middle Eastern tensions. I would suspect there will be further air strikes from the US and attempted retaliation by the Houthis.

The risks of a further worsening in tensions could put major currencies under limited short-term pressure against the USD, as it potentially reduces growth prospects and increases inflation risks, in my view. Meanwhile though, there could be some signals from the likes of the Federal Reserve’s Beige Book, which outlines the current economic position in the US, of tightening credit conditions and an ongoing slowing in the pace of economic expansion. Will that contrast with what the UK labour market, consumer prices and retail sales figures indicate, and will there be any good news from the Euroland economy? 

The risks in the UK and Euroland still appear to be to the downside as far as activity is concerned, but the inflation data might show that progress is slowing there also. So in FX terms, I think the conflict of weaker activity and stronger inflation is a potential threat to the GBP’s and EUR’s progress higher against the USD.

Is China at risk of slipping again?

The PMI (Purchasing Managers’ Index) figures released from China at the beginning of the year suggested a small, gradual improvement in performance, thanks in large part I believe, to the additional fiscal stimulus agreed by the Chinese government. However, the decision of the People’s Bank of China to hold the 1-year policy loans rate at 2.5% will have disappointed businesses and investors, when a 10-basis point cut to the rate had been expected. 

Credit expansion has been weak, and whilst the PBOC (People’s Bank of China) might worry about the performance of the renminbi, if monetary policy doesn’t support the fiscal policy expansion, the economy could easily lose momentum once again, in my view. The CNY currency weakness remains a risk, with global activity weakness likely to make exporting conditions very challenging in 2024.

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