The United States Dollar is consolidating yesterday’s rather large gains and is still trading at its strongest point against G10 currencies in more than a month.
Overview
Primarily fueled, once again, by shifting interest rate cut bets across the world, the Dollar is also benefiting from faltering Chinese data and a more general risk-off sentiment as the Red Sea and larger Middle East situation continue to grow murkier. Equities remain downbeat on the year as many traders begin to wonder if they may have been a bit overzealous in raising their expectations for up to 50 basis points of easing from the Federal Reserve in March and speculation over how much and how fast the Fed may cut rates continues to boost the Buck.
Down from an 80% chance of such a cut coming in March, followed by an expected second cut in May, markets now see just one cut in either March or May. These expectations were shifted on insights from several Federal Reserve voting members, notably Christopher Waller. Though Waller did say the door to cutting rates is open (something that’s no longer really up for debate), he made sure to emphasize that if cuts do come, they may not be early or at consecutive meetings. Traders surely would still like to believe the Fed may ease as much as 150 basis points this year, but as the Fed’s own dot plot only telegraphs 75, they may be in for a nasty surprise come the second half of this year. This morning, as well, US retail sales showed a stronger-than-expected December, growing 0.8% in the control group. Import prices also did not contract, as markets expected, and were flat for the month, all serving to pour further proverbial cold water on cutting expectations.
In China, though GDP did, at least on the headline figure, meet expectations, continued woes in the real estate sector dominated the market mood overnight. Deflationary pressures and a continuing property crisis are serving to dampen global sentiment, particularly seen in oil prices as concerns over demand from the world’s second-largest economy arise. Coupled with rising tensions in the Red Sea and continued military action in the Middle East at large, the global mood in this young year is rather grim.
What to Watch Today…
GBP ⇑
The lone bright spot against USD in the G10, Pound Sterling gained nearly half a percent today in European trading. UK CPI this morning showed a re-acceleration of price pressures for the first time in 10 months, and as a result interest rate bets for the Bank of England are shifting more in line with what Andrew Bailey has been preaching for the last few months. Traders now expect just 100 basis points of cuts this year, down from visions of 150 earlier this month. It remains to be seen, however, just how much easing the BoE needs to enact to keep the UK economy afloat as politicians push for growth in an election year.
MXN ⇓
Mexican Peso was routed in trading yesterday and looks to continue weakening again today, losing ground of 2 and a half percent since Tuesday’s open against the US Dollar. Emerging market FX as a whole lost bigly yesterday, and MXN was no exception after the first primary for the 2024 presidential election in the US showed former president Donald Trump with a commanding lead in the race for the Republican nomination. As his trade policies were less favorable for Mexico and tensions ran rather high between the US and Mexico during his tenure, MXN remains quite sensitive to US political developments.
