The Foreign Exchange markets, just like other financial markets, took a 180-degree turn at the start of 2024. Risk assets and commodities are losing value whilst the dollar is strengthening, as a consequence of the decline in bets for a rapid start to interest rate cuts by the Federal Reserve.
There are also scant expectations for rate cuts from Tuesday’s Monetary Policy Council meeting that is coming to an end, which – with a fair degree of certainty – will hold rates at the current level for the third consecutive time. We should focus our attention on changes in the statement and Wednesday’s press conference by President Glapiński.
This week, the attention will be focused on perhaps the most significant macroeconomic reading for markets worldwide: US CPI inflation (Thursday 11.01). It is expected that December data will show further normalization of core price pressure. If we receive an upward surprise in this regard, the odds for the Federal Reserve to start lax monetary policy in March will decrease even more, strengthening the dollar.
The week will be complemented by November’s hard macroeconomic data from the Old Continent, including industrial production in Germany (Tuesday 09.01) and GDP readings for Great Britain (Friday 12.01). There will also be a series of speeches by Federal Reserve and European Central Bank officials. Markets are gradually emerging from the holiday lethargy, which means trading volumes will increase, improving liquidity.
The EUR/PLN rate remains close to 4.35 after soaring from over three-year lows reached in mid-December. The recent drop in industrial PMI marginally weakened optimism for the rebound prospects of the Polish economy, but these are still very strong. According to the latest macroeconomic survey of NBP, the surveyed consensus expects GDP growth of 3% this year. We would be surprised if growth is below this value.
This week (Tuesday 09.01) will mark the first Monetary Policy Council meeting of 2024, but it is unlikely to play a particularly significant role. Despite an unexpectedly severe drop in inflation from 6.6% in November to 6.1% in December, which we learned about on Friday, a cut in interest rates would be a huge surprise and is not expected by the markets, the consensus, or us. We believe that the bank will act cautiously and continue to emphasise uncertainty, including that related to the recent change of government. Besides the meeting, we will focus on the current account data for November – in 2023 the zloty benefited from its positive evolution.
There is a growing disparity between the pronounced hawkishness of the ECB and poor economic readings in the euro area. December’s inflation data was mixed. The main measure increased due to the withdrawal of energy subsidies, but the more significant core measure continues to decrease and is currently just below the ECB’s deposit rate.
This week, very few valuable data will reach us. Attention will focus on speeches by ECB officials, particularly chief economist Philip Lane. He may clarify the bank’s view of the euro area’s ongoing economic weakness and its impact on monetary policy. Financial markets still foresee a high likelihood of the start of regulatory easing in Europe in the first quarter, but these expectations are being pushed back similarly to other economies around the world.
The mixed December labor market report (non-farm payrolls, NFP) from the United States provided confusing signals: job creation remained solid as did wage growth, but labor market participation fell significantly. Investors initially reacted positively to the strong increase in jobs, causing the dollar to appreciate, but quickly lost gains when they realized the downward revision of October and November data by 71,000 was greater than the overage in the last month of the year.
It remains characterized by full employment, although warning signs of cooling are increasing. All this will be overshadowed, however, by the CPI inflation reading for December (Thursday 11.01). We believe that the markets are still overestimating the odds of the Fed cutting interest rates as soon as March (currently close to 2/3 vs. around 100% at the end of the year), and inflation data will help to resolve this issue.
The British pound was the only G10 currency last week keeping up with the dollar. Two significant factors in this context were the demand resilience shown in the data and the relative hawkishness of the Bank of England, which results in the highest interest rates in the G10 group and a relatively slow schedule for their reduction in 2024.
This week, attention will focus on November’s GDP reading (Friday 12.01). Investors are expecting healthy growth after October’s decline, which would be consistent with the broad rebound observed in PMI indicators of business activity. However, following the downward revision of third-quarter data, a technical recession in the fourth quarter cannot be ruled out. We believe, however, that this threat will be averted when the official reading for the fourth quarter is published in mid-February.
Authors: Enrique Diaz-Alvarez, Matthew Ryan, Roman Ziruk, Itsaso Apezteguia, Michał Jóźwiak – Analysts at Ebury
