1. US Dollar Trades Muted Amid Holiday, Rate Cut Speculation
The US dollar started the week trading in a muted fashion, with limited activity due to the Martin Luther King Jr. Day holiday in the United States. Traders are currently considering the chances of early rate cuts by the Federal Reserve, following the unexpected drop in US retail sales data released on Friday. This drop has increased market bets that the Fed may start cutting interest rates earlier than expected. The US data calendar for the week is relatively quiet, with the main focus being on Wednesday’s retail sales data release. This data will provide insights into how consumer spending is holding up in the face of elevated interest rates.
2. Quiet Week Ahead for US Dollar as Focus Shifts to Retail Sales Data
The US data calendar for the week is relatively quiet, with the main focus being on Wednesday’s retail sales data release. This data will be closely watched for indications of whether consumer spending, a major driver of economic growth, is remaining resilient despite elevated interest rates. Analysts are expecting retail sales to have risen 0.4% in December, following a 0.3% increase in November. However, there are concerns that this data may not be sufficient to trigger a USD rebound. The consensus view among investors seems to be a decline in the dollar later this year, which has made them keen to sell dollar rallies.
3. Euro Edges Higher Despite German GDP Contraction
The euro edged higher despite data revealing that the German economy, the largest in the eurozone, contracted by 0.3% in the final quarter of last year and shrank by the same amount over the full-year 2023. The president of the Federal Statistics Office attributed this contraction to the multiple crises in the current environment. However, recent inflation data in the eurozone has confirmed the current thinking at the European Central Bank (ECB), suggesting that interest rate cuts are not a near-term topic of debate. The ECB’s chief economist stated that inflation rose to 2.9% in December, from 2.4% in November.
4. Pound Falls Ahead of UK Economic Data Release
The pound fell slightly ahead of a busy week for UK economic data releases. Data on UK unemployment is due on Tuesday, followed by inflation figures on Wednesday and retail sales data on Friday. Market analysts are particularly interested in the services inflation figure, which is crucial for the Bank of England’s monetary policy decisions. Despite some improvement, services inflation is still expected to remain high at 6.1%, which is unlikely to prompt the Bank of England to endorse dovish rate expectations.
5. Yuan Slips After PBOC Keeps Rates Unchanged, Japanese Inflation Expected to Decline
The Chinese yuan slipped after the People’s Bank of China (PBOC) unexpectedly kept medium-term lending rates unchanged. This decision suggests that the PBOC may have limited room to loosen monetary policy further and support the Chinese economy. Meanwhile, Japan is expected to release data later this week showing a sustained decline in inflation. This has led to persistent bets that the Bank of Japan will largely maintain its ultra-dovish policy when it meets later this month. Investors will keep a close eye on these developments to assess the economic outlook for both China and Japan.
Analyst comment
1. Negative news: The US dollar is trading muted due to the holiday and rate cut speculation. Market bets suggest the Fed may cut rates earlier than expected.
Market Forecast: The market may see increased volatility as investors await Wednesday’s retail sales data.
2. Negative news: The US data calendar is quiet, with focus on Wednesday’s retail sales data. Investors expect a decline in the US dollar and are eager to sell dollar rallies.
Market Forecast: The US dollar is likely to weaken in the near term, with limited expectations for a rebound after the retail sales data release.
3. Neutral news: The euro edged higher despite the German GDP contraction. Inflation data suggests interest rate cuts are not a near-term concern for the ECB.
Market Forecast: The euro may continue to trade higher, but the contraction in the German economy could limit its gains.
4. Negative news: The pound fell ahead of UK economic data releases. Services inflation is expected to remain high, reducing the likelihood of dovish rate expectations.
Market Forecast: The pound may continue to decline as investors anticipate mixed economic data from the UK.
5. Negative news: The yuan slipped after the PBOC kept rates unchanged, suggesting limited room for further monetary policy loosening. Japanese inflation is expected to decline.
Market Forecast: The yuan may face downward pressure, while the Bank of Japan is likely to maintain its ultra-dovish policy, leading to a weaker Japanese yen.
