The Morning Update

Thursday February 1st, 2024

Written by:
Paul Harrison

The USD strengthens, oil prices firm, while equity markets and US yields are mixed as risk sentiment wanes. The USD strengthens to near 2-month highs against its peers. At the same time, equity markets reset their expectations on when the Federal Reserve will start cutting interest rates and focus on the slew of corporate earnings. Fed Chair Powell said it "does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2%." Investors are shifting focus today to the Bank of England's interest rate decision and earnings from US tech giants Apple, Amazon, and Meta Platforms. Elsewhere, oil prices rebounded in early trading on Wednesday after their biggest decline on geopolitical concerns and robust US supply in nearly a month. In focus today, the BoE Rate decision, US Initial Jobless Claims, Nonfarm Productivity, ISM Manufacturing PMI, and CAD global Manufacturing PMI will help provide intraday direction to currency markets.

In other news. The EU agrees on a new Euro 50 billion aid package for Ukraine, overcoming Hungary's objections. US Fed Chair Powell says Fed rate cut in March is 'not  base case.' Biden appoints John Podesta as US's top climate diplomat, replacing John Kerry. Musk says Tesla will hold shareholder votes to incorporate in Texas. Canada's apartment rental market is the tightest on record in 2023. Factories deliver mixed performance globally in January, with manufacturing down in the Eurozone, expanding in South Korea, unchanged in China, and shrinking in UK & Japan. Nvidia's new China-focused AI chip is set to be sold at similar prices to Huawei products.

In currency markets. The USD tests 7-week highs as a Fed March rate cut is taken off the table by Fed Chair Powell. The focus shifts to the BoE interest rate decision to provide GBP direction. CNY weakens by 0.25%, While Asian currencies slip by 0.1% on average vs USD. Trading currencies are under pressure, with AUD & SEK tumbling by 0.9%, NZD weakened by 0.6%, MXN dropping by 0.4%, CHF & NOK are& ZAR are down 0.25%, while outlier JPY is up 0.1% vs USD.

In commodity markets. Oli prices strengthened by 0.75%, Natural Gas prices rallied by 1.6%, Gold, Wheat & Copper prices dropped by 1.1%, Silver prices tumbled by 1.8%, and Soybean prices weakened by 0.8%.

CAD weakened against the USD after the Federal Reserve dashed hopes of a March interest rate cut and left the door open for interest rates higher for longer. Domestically, Canada's GDP surprised markets on Wednesday with better-than-expected growth in November and early signs of an uptick in December. Desjardins Canadian Economist Bartlett noted, "The relatively broad-based gains were led by outstanding performance in goods-producing sectors, with agriculture, utilities, and manufacturing all shedding their recent weakness." Intraday, we feel the CAD has room to retest 1.3500, but the focus will be on the US data, and CAD Global Manufacturing PMI will help provide intraday direction to the loonie.

EURCAD holds steady, just off 4-month lows, as pressure builds on the ECB to ease rates as domestic interest rates continue to fall.

EUR struggles to hold above 1.0800 following the Fed statement and Euro inflation data. The bearish momentum continues for the Euro as interest differentials remain at the forefront of the euro's weakness. Domestically, the harmonized index of consumer prices inflation saw a fall y/y from 2.9% to 2.8% and dropped from +0.2% in December to -0.4% in January. Speculation is growing that the ECB will ease its domestic interest rates ahead of the Fed in 2024. The prospect of widening interest rate differentials is expected to keep the euro under pressure vs the USD.

GBPEUR weakens in early trading as the pound consolidates ahead of the BoE interest rate decision.

GBP weakens heading into Super Thursday. The Bank of England will likely continue to pause interest rates in its first meeting of 2024. The Bank of England is expected to leave its benchmark interest rates unchanged at 5.25% at its policy meeting today. The Monetary Policy report will follow the policy announcement, and then a press conference by Governor Bailey is expected at 12.30 GMT. UK inflation levels hold at 4.%, while the UK GDP expanded by 0.3% in November. Meanwhile, BoE Deputy Governor Breeden said following the December policy meeting that "it's important for the monetary policy to be restrictive for an extended period." Intraday, the BoE Governor's press conference, and the US data releases will help provide intraday direction to currency markets.