After a public holiday in the US yesterday, the United States Dollar is returning to its winning ways and sitting just off a one-month high against most major currencies this morning.
Overview
The Bloomberg Dollar Spot Index gained just shy of half a percent overnight and into this morning, as geopolitical risk events coupled with shifting expectations for an easing cycle drive demand for the Dollar up across the board. European stock indices are in the red today, with US equities set to open lower in tandem. Declines in bank shares are leading the charge as corporate earnings season continues this week.
The biggest single mover for USD today is, as we’ve discussed over the last month, bets on when exactly the Federal Reserve will begin to cut interest rates. Though the odds of a cut in March are still relatively steady, around 70%, the odds of a subsequent 25 basis point cut in May have decreased dramatically. Previously, markets saw it likely that the Fed would cut rates a total of 50 basis points by May. As it stands now, however, expectations are shifting toward one 25-point cut either in March or May. As a result, and with the assessment of the macroeconomic pictures of other G7 nations, our view that the Fed is unlikely to be the first or the fastest to cut interest rates is moving closer to the market consensus. Interest rate differential, as highlighted through the second half of last year, continues to be a primary driver of FX pricing, and the Dollar is its beneficiary today.
Around the world, geopolitical risk events continue to drive haven flows to USD as well. Over the weekend, tensions in the Middle East continued to ratchet up as the US-led coalition and Houthi rebels continued to trade strikes in the Red Sea. Iran also announced that it had launched missiles at Iraqi and Syrian targets after the same US coalition targeted Houthi militants inside the nation of Iran. This is an early indication of the kind of spillover from the Israel/Hamas war that many leaders expressed concern over, and tensions in the region will continue to be at the forefront of risk considerations for some time.
What to Watch Today…
- Davos World Economic Forum
- US Retail Sales, Wednesday 8:30 AM
- Monex USA Online is always open.
GBP ⇓
Pound Sterling fell more than half a percent against USD to start the morning after average weekly earnings in the UK over the last 3 months grew slower than expected. This shows an easing to continued inflationary pressures in the UK, but not enough to help the Bank of England declare victory over these pressures, and Governor Andrew Bailey has continued to say that the BoE will likely be closer to the back of the pack when it comes to interest rate cuts. CPI for the UK, released tomorrow, will provide some further evidence as to which direction the BoE may be leaning.
AUD ⇓
The Australian Dollar is the biggest loser of the G10 board this morning, declining more than three-quarters of a percent against the Buck. Once again, price action in the Antipodean currency is driven heavily by news from its biggest trading partner. Chinese Premier Li Qiang said at the Davos World Economic Forum that 2023 GDP growth reached roughly 5.2%, but markets don’t necessarily believe this announcement, especially given the continuing woes in the nation’s property sector. It was also reported over the weekend that China is considering issuing up to $139 billion in special bonds, a further sign that China’s economic woes may be stacking up.
