The Morning Update

Thursday January 25th, 2024

Written by:
Paul Harrison

The USD steadies, oil prices strengthened, while equity markets and US yields are mixed ahead of the ECB and the US GDP. Currency markets are subdued as markets expect the ECB to hold but will be monitoring its statement timelines on the direction of interest rates. Markets are also focused on the US GDP, which is forecasted to show the economy expanded at a 2% annualized rate in Q4/23. A slew of other US figures are also due, which should offer a snapshot of the US economy before the Fed Reserve meeting at the end of the month. Equity markets lost momentum as investors processed the latest earnings news, as reports from Tesla Inc. disappointed investors, and the stock dropped nearly 8% after missing earnings estimates. Elsewhere, the US 30-year yield eased in early trading, having hit a 2024 high on Wednesday. Oil prices strengthened due to lower US crude stock levels, China stimulus expectations, and ongoing Red Sea tensions. Today's focus on the ECB rate decision, the US GDP, initial jobless claims, durable goods orders, nondefense capital goods orders, and new home sales change will help provide intraday market direction.

In other news. Tesla stock drops on Q4 earnings miss, warns production growth rate will be 'notably lower' than 2023. "opportunistic" Chinese lines send ships to serve Red Sea ports. Brussels struggles to placate farmers as far right stokes protests. Multinationals urge Yellen not to let politics stop the US Steel deal. The UK car industry is 'back in the game' after a GBP 24 billion investment pledged in a single year. Regulator blocks expanded production of Boeing's 737 Max. In Canada, the long-delayed Trans Mountain pipeline will start filling with oil in February. Turkey hikes interest rates again to 45% after inflation nears 65%.

In currency markets. The USD steadies ahead of the US GDP, the ECB rate decision, and the statement. The Chinese yuan eased after Wednesday's banking reserve requirement ratio cut. CNY weakens by 0.25%, while Asian currencies slip by 0.1% on average vs USD. Trading currencies are mixed, with JPY, CHF & MXN down 0.15%, ZAR edged higher by 0.1%, SEK up 0.2%, AUD, NOK & NZD firmed by 0.25% vs USD.

In commodity markets. Oil prices strengthened by 1.5%, Natural Gas prices rallied by 7.5%, Gold and Soybean prices are up by 0.2%, Silver prices firmed by 0.6%, Copper prices are flat, and Wheat prices gained by 0.4%.

CAD slips to a fresh weekly low after the Bank of Canada kept interest rates on hold but signals it's done with interest rate hikes. The BoC Governor Macklem's statement was taken as dovish by markets after comments that bank officials believe that past rate increases of 475 basis points since 2022 are sufficient to quell inflation. The comments opened the door to rate cuts in coming months, with many analysts expecting the BoC to be the first major central bank to cut interest rates. The prospect of widening interest rate differentials between the Fed and other central bank peers has put selling pressure on the loonie, a break of 1.3530, which could see a retest of 1.3600 next. Intraday, the US economic data releases will help guide the loonie today.

EURCAD holds steady as investors remain sidelined ahead of the ECB rate decision and the following statement.

EUR straddles 1.0900 ahead of the ECB rate decision and a flurry of US data releases today. The euro stalls within a narrow trading range as investors sit on the sidelines ahead of the ECB policy announcement. The ECB is expected to leave key rates unchanged, but investors will be focused on the policy statement to see if ECB President Lagarde adopts a more dovish tone or if she maintains the wait-and-see stance. If Lagarde follows the BoC, taking a dovish stance over the worsening growth outlook, opening the door to a reduction by June would weigh heavily on the euro. We anticipate that euro volatility will increase due to a flurry of US data releases and the ECB decision.

GBPEUR holds steady at five-month highs as markets see an increased prospect that the ECB could pivot on its interest rate policy.

GBP consolidates above 1.2700 heading into the US data releases. The pound is treading water as investors are sidelined as markets await the Q4 GDP, Durable Goods Orders, and the weekly Jobless Claims data out of the US. Domestically, the UK PMI data showed that the private sector's economic activity expanded robustly in January. The PMI data beat expectations, and the ongoing Red Sea tensions could see reignited inflation levels, which may deter the BoE from pivoting its interest rate policy. Intraday, the US data results will help drive the direction for the pound today.