The Morning Update

Wednesday January 31st, 2024

Written by:
Paul Harrison

The USD firms, oil prices fall, equity markets are mixed, and US yields ease as attention turns to the Fed. The USD edges higher ahead of the Federal Reserve's interest rate decision later today. The Fed is expected to keep rates on hold at a 22-year high of 5.25% to 5.5%, and traders expect a 40% chance that the bank will lower rates for the first time in March, while most Fed officials say it is too soon to speculate on a pivot on rates. Equity markets came under pressure after earnings from tech giants and artificial intelligence fell below their high expectations. Equities in China & Hong Kong extended losses after data continued to show more contraction in China's factory activity. Elsewhere, oil prices weakened today on disappointing China data but look set for their first monthly gain since September on escalating tensions in the Red Sea. Alongside the FOMC rate decision and statement, investors will also be focused on the US ADP employment change, Chicago PMI, and CAD GDP to help provide intraday direction to currency markets today.

In other news. Israeli forces pounded Gaza while Hamas studied a ceasefire proposal. Euro area governments smash bond sale records in a hefty funding year. Chinese hackers are targeting US infrastructure, FBI chief to testify. Explorers may have found Amelia Earhart's plane wreckage in the Pacific. Russian anti-war candidate Nadezhdin says he has enough signatures to challenge Putin. Farmer protests spread in Europe ahead of the EU summit. China Evergrande acknowledges the HK court order to liquidate. Canada's aging nuclear plant near Toronto will get C$2 billion refurbishment. The government says Argentina's mega reform bill is set to pass in Congress. A US judge voided Elon Musk's record $55 billion Tesla pay package. Iran-backed Iraqi militia says it has suspended attacks on US forces.

In currency news. The USD index is up over 2% month-to-date, its strongest performance since September, finishing January on a solid footing as expectations grow that the Fed will keep interest rates higher for longer. Elsewhere, the JPY dropped nearly 5%, ZAR weakened 2.4%, the Euro fell almost 2%, and CNY slipped 1.1% vs the USD in January. Intraday investors will be focused on the FOMC statement to provide direction to currency markets. CNY and Asian currencies markets are flat on average vs USD. Trading currencies are mixed, with AUD falling 0.4%, NZD, CHF & NOK dropping 0.3%, JPY eases 0.15%, SEK is flat, MXN firms 0.1%, and ZAR rallies 0.5% vs USD.

In commodity news. Oil, Wheat, and Soybean prices weakened by 1%, Natural gas prices dropped by 0.6%, Gold prices firmed by 0.2%, and Silver prices slipped by 0.25%.

CAD bounces off its January highs as oil prices ease and markets consolidate ahead of today's Fed's interest rate decision and statement. Domestically, the Canadian GDP is expected to rise slightly to 0.1% in November after stalling in October. Investors increasingly expect the BoC to lower its interest rates as early as May after it signaled last week that it has pivoted its interest rate policy. If the Fed maintains a hawkish tone, we could see the CAD weaken towards 1.3500.

EURCAD edges slightly higher but continues to linger near 4-month lows as expectations are growing that the ECB could ease domestic interest rates as early as April.

EUR steadies above 1.0800 as investors are sidelined ahead of the Fed interest rate decision and statement. Domestically, falling French inflation fuels investors' speculation of an early ECB interest rate cut. At the same time, ECB Lagarge continued reiterating that they would need to be further into the disinflationary process before cutting the rates and supporting the currency. Euro remains under pressure and could weaken further unless the Fed takes a more dovish stance in its statement today.

GBPEUR slips in early trading, but month-to-date remains up 1.5% as expectations are that the ECB will lower interest rates ahead of the BoE and expectations that diverging interest rates will provide underlying support to the pound.

GBP remains capped at 1.2700, heading into the Fed and BoE rates decisions today and tomorrow, respectively. Increasing geopolitical tensions continue to fuel safe-haven USD demand, and caution ahead of the Fed & BoE rate decisions is sidelining investor activity. Domestically, UK business starts 2024 with confidence rising to a two-year high, and UK house prices beat forecasts as mortgage rates edge down. Today, any suggestion of a dovish tone from the Fed could see the pound rebound towards 1.2750, ahead of the BoE interest rate decision tomorrow.