By Stuart Talman, XE currency strategist
Despite an ECB rate decision and fourth quarter US GDP that printed above consensus by an astonishing margin, the action from Thursday's sessions has elicited some yawns.
US equity markets continue their relentless ascent, griding higher in tight ranges whilst risk sensitive currencies, including the New Zealand and Australian dollars refrain from hitching a ride with stocks, remaining entrenched in prevailing ranges and within close proximity of recent swing lows.
Net moves for the majors have been contained between +/- 0.5% with 8 of the G10 trading even tighter still.
The New Zealand dollar ekes out a marginal gain, price action squeezed into a ~30 pip range, the pair maintaining a dubious foothold above 61 US cents whilst unable to mount an ascent beyond 0.6150.
It appears that currencies have slipped into wait-and-see mode ahead of next week which delivers the first FOMC meeting for the year and the January jobs report.
Following Jerome Powell's surprisingly dovish pivot at the December FOMC meeting, in which the Fed chair's comments made it clear the committee had shifted its focus from higher for longer to the timing of the first rate cut, many pundits are calling for a hawkish Powell to re-emerge at the FOMC presser, pushing back against the market's expectations of a cut as early as March.
Market pricing assigns a near 50/50 implied probability the Fed funds target rate is lowered 25 bps to 5.00% - 5.25% on 20 March whilst close to 160 bps (6 or 7 quarter points cuts) of accumulative easing is projected through 2024.
Certainly, Thursday's release of fourth quarter GDP data will provide Powell with ammunition to fire back against calls for monetary easing to commence before the northern hemisphere summer.
Economic growth in the world's largest economy expanded at an annualised rate of 3.3% through the December quarter, smashing the consensus estimate of 2.0% and well above any polled analysts' projections. The staggering result was underpinned by impressive household spending which accounts for over two-thirds of the US economy. Higher levels of government spending also a notable contributor.
The result emboldens the immaculate disinflation camp, a term used to describe a scenario in which the Federal Reserve returns inflation to its 2% target whilst maintaining strong growth and low unemployment.
The immaculate disinflation sceptics (including this author) reference the historical context - there is no precedent. If economic growth sustains its current run-rate and the unemployment rate remains below 4%, a second inflationary wave is an inevitability.
The Fed won't be cutting rates if inflation remains above 2% whilst simultaneously the jobs market remains tight and US households maintain current spending levels.
They will, however, be quick to commence an easing cycle should macroeconomic data rapidly deteriorate……something US equity markets are yet to cotton to.
Over-exuberance and complacency are the state of play.
Heading across the Atlantic, as widely expected the ECM has maintained current policy settings, the key takeaways from the first meeting of the year:
- ECB on hold, maintains 4.00% deposit rate
- Accompanying statement a near carbon-copy of DEC. statement
- ECB refrains from providing forward guidance
ECB President Lagarde again stressed during her press conference that the Governing Council believes it remains premature to be discussing rate cuts, acknowledging the importance of wages data over the coming months in determining the path for policy rates.
Whilst activity data for the eurozone economy continues to soften, core inflation remains north of 3% with disinflationary momentum stalling in recent months. Inflation closer to 2% sets out a path for the ECB to commence monetary easing, which may commence sometime in early 2H, dependant on the macroeconomic data flow.
The Kiwi looks to have ended its ~3% downswing versus the euro off the 20 December high near 0.5750 having based around 0.5580 earlier in the week. Rallying in two of the past three days to move back above the 200-day moving average, NZDEUR marked Thursday's highs at 0.5650.
The eurozone economy looks to be one of the more vulnerable amongst its developed nations peers as evidenced by the relatively poor S&P Global manufacturing and services PMIs released, Wednesday.
We look for NZDEUR to test the 0.5750 swing high before the end of 1Q should eurozone data continue to deteriorate.
Looking to the day ahead, the regional focus will be on CPI data for Tokyo whilst the monthly reading on the Fed's preferred inflation gauge, core personal consumption expenditures is the headline scheduled data release. The month-on-month consensus estimate is 0.2%. At the peak of the reflation cycle, a run of monthly readings ranged between 0.4% and 0.6%.
A MoM PCE downside surprise will likely tip the odds back in favour of a 25-bps cut at the March FOMC meeting.
As for the New Zealand dollar - nothing to see here. Mundane price action likely not to venture to far away from 61 US cents.
Stuart Talman is Director of Sales at XE. You can contact him here.
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