The Morning Update

Monday January 29th, 2024

Written by:
Paul Harrison

The USD strengthens, oil prices hold steady, equity markets are mixed, and US yields ease amid earnings, rates, and geopolitical tensions. Markets start the week cautiously as investors brace for the Fed & the BoE, the rising tensions in the Middle East, and a flurry of tech giants' earnings this week. The Federal Reserve policy decision is on Wednesday, followed by the Bank of England on Thursday, and the critical US payroll numbers will be released on Friday. Markets remain cautious with the rising tensions in the Middle East after the attack on the US, which killed three service members, and with President Biden pledging to retaliate. This week also sees corporate earnings from Apple Inc., Microsoft Corp., Google parent Alphabet Inc., and others, which will help provide direction to the equity markets. Elsewhere, Chinese property shares erased early gains after a Hong Kong court ordered the liquidation of the China Evergrande Group. We expect markets to be sidelined today without high-tier economic releases, remaining focused on the FOMC on Wednesday and Middle East updates.

In other news. China Evergrande ordered to liquidate in a landmark moment for the crisis-hit sector. Iran distances itself from the attack on US troops-FT. Brussels threatens to hit Hungary's economy if Orban vetoes Ukraine aid. Biden says Iran-backed militants killed 3 US troops in drone attack. In the UK, Sunak's smoking and vaping band will pass and endure despite rightwing rebellion. UN chief urges countries not to pull funding over Israel attack allegations. Burkina Faso, Mali, and Niger quit the regional bloc (ECOWAS) in an escalation of tension. The Business Council of Canada calls for a return to Canada-UK trade talks.

In currency markets. The USD and commodity currency edge higher, while Asian and European currencies ease in cautious markets. CNY and Asian currencies slip 0.1% on average vs USD. Trading currencies are mixed, with SEK weakening 0.4%, ZAR & NOK slipping 0.1%, MXN i flat, JPY & CHF up 0.25%, and AUD & NZD strengthening 0.4% vs USD.

In commodity markets. Oil & Copper are up by 0.1%, Natural Gas prices tumbled by 5.9%, Gold prices firmed by 0.5%, Silver prices advanced by 0.9%, Wheat prices weakened by 1.4%, and Soybean prices dropped by 0.6%.

CAD edges higher in cautious markets, with oil and precious metal prices holding positively in early trading. Last week, we saw the BoC pivot on its rate policy, but investors remain cautious until we hear the Fed's policy stance on Wednesday. Canada also recorded a C$19.1 budget deficit over the first eight months of 23/24, with year-to-date revenues up 2.6%, mainly reflecting higher personal income taxes and duties. We expect the loonie to be stalled in a tight trading range ahead of the FOMC meeting and the US response to the attacks on the weekend.

EURCAD weakens as commodity prices hold steady, and the euro suffers from increasing USD demand amid growing geopolitical tensions in the Middle East.

EUR comes under selling pressure, down 2% in January, retesting near 8-week lows at 1.0800. The euro is entering its 3rd week in negative territory based on muted comments that the ECB pivoted its interest rate policy last week and the increasing shift to the USD amid increasing tension in the Middle East. This week, investors are expected to be sidelined ahead of the FOMC and BoE interest rate decisions.

GBPEUR advances as the euro remains under pressure amid escalating tensions in the Middle East and anticipation that the BoE will maintain its interest rate policy on Thursday.

GBP straddles 1.2700 as the pound consolidates ahead of Thursday's Bank of England interest rate decision. The pound has been resilient from an increasing shift to the safe-haven USD amid increasing tensions in the Middle East. Domestically, a recent survey from the UK public showed that the UK public has a more optimistic outlook for inflation levels falling to 3.5%, down from 4.2% back in October, with longer-term expectations dropping to 3.4%. Intraday, without any high-their economic releases, we expect the pound to hold above 1.2650 ahead of Thursday's BoE interest rate decision.