News & Analysis

The start of this week saw Asian markets returning just as North America went on holiday. That left the focus coming into the week on Chinese stimulus efforts, though these arguably failed to have the desired effect, instead raising yet further questions around Chinese growth. Outside this, a lack of liquidity and a light data calendar meant that price action was muted in the early part of the week. That was until Thursday, when Nvidia earnings triggered a risk on sugar rush to temporarily shake markets out of their stupor, though with FX traders rapidly coming to their senses, the immediate dollar selloff was soon reversed. That left many looking towards the weeks main event, European PMIs, which largely landed on expectations. These once again painted a picture of weak eurozone growth contrasted against reasonably strong expansion underway in the UK. The one notable surprise was arguably the tick up in price pressures on the continent, particularly in Germany, where the outlook for growth remains bleak. Nevertheless, it was sufficient to prevent markets from accelerating ECB easing bets on the back of weak growth, but also keeping GBPEUR price action contained on the day, in spite of better UK fundamentals. For the broad dollar, even some hawkish comments by the Fed’s Waller early on Friday morning failed to spark some upside, leaving the greenback to close out the week down around three tenths of a percent.

Next week, it will be inflation dynamics outside the US that are set to be in focus for FX markets. The week starts with CPI data out of Japan that looks set to show a further cooling in price growth, which could sow some seeds of doubt in the minds of BoJ policymakers, and trigger a move higher for USDJPY. Two central bank decisions then fill out the middle of the week. The first of these comes from the NBH, where faster than expected disinflation likely sees policymakers accelerate the rate of pace cuts. In New Zealand by contrast, the discussion will be about inflationary stickiness, and although we expect the RBNZ to remain on hold, some are speculating about the risk of another rate hike. This is then followed with by a Canadian GDP print, which should show a narrow escape from recession at the end of last year. Finally, the week comes to a close with eurozone inflation data, the last set of figures due before the ECB’s March meeting. This will almost certainly confirm the need for a downgrade to the bank’s inflation forecasts next month, adding further support to our call for an April start to eurozone rate cuts, which could in turn weigh on the euro. As such, with both the euro and the yen facing downside risks next week, a path higher for the broad dollar could still be unlocked next week, despite a relative lack of domestic US events to act as an upside catalyst.

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Authors: 

Simon Harvey, Head of FX Analysis

María Marcos, FX Market Analyst

Nick Rees, FX Market Analyst

 

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