Published: February 7th, 2024
The Greenback's confident stride into the new week got an additional kick following release of an American economic print that shows the US economy has entered 2024 on a growth footing.
The ISM purchasing managers index (PMI) for January came in at 53.3, up from 50.5 in December 2023 and jumping past consensus expectations for 52.
In a notable uptick, the survey's employment index rose from 42.7 to 50.5, confirming what markets suspected, that America’s labor market is robust.
In an analyst note published Tuesday, HSBC's European FX Unit wrote that ‘USD is rallying off the back of another positive data print. Following the far higher-than-expected non-farm payrolls figures published last Friday (2nd February), this week's PMI numbers exceeded expectations as well, with stronger data across almost every subcategory.’
The PMI data came hot on the heels of last week’s non-farm payrolls print, which vastly exceeded even the most upbeat estimates. It all but evaporates the odds of a March rate cut by the US Federal Reserve.
The Dollar spiked in the immediate aftermath of Friday's release, and again after this week's robust PMI reading. Taken together they can't be dismissed as anomalies, and forex traders are expanding their Greenback positions as a result.
Looking to the medium term, HSBC says USD will be hard to stop: ‘The continued strength of the American economy compared to what's happening with most of its G10 peers is why we’ve maintained a bullish view on USD, which has been against consensus since October of 2023.’
With consecutive strong US data prints, the Fed will have little reason to reduce interest rates for the foreseeable future. That stance will support the Dollar and US bond yields as well.
In February 2023 the Dollar was overtaking all its G10 peers. Forex analysts at MUFG said that the USD comeback was powering past risk-off sentiment and shrugging off trader concerns about the imminent release of minutes by the US Fed’s open markets committee.
With investors also discounting PCE deflator data due the same month, MUFG said traders were witnessing the near-term return of Dollar dominance.
‘The upward adjustment to a higher terminal rate and cooling rate cut expectations for later in 2023 have spurred new life into the strong USD trade we saw at the end of 2022,’ says MUFG’s briefing.
Adding wind to USD’s sails was a lifting of investor expectations about the timing of the Federal Reserve's peak interest rate hiking cycle.
In January 2023, consensus had the last rate rise set for March, but an additional two hikes were then added to the table.
The likelihood of a rate cut in the latter part of 2023 receded, giving the Dollar Q1-23 support after an underwhelming end to 2022 and beginning to 2023.
EURUSD rushed toward 1.10 in January 2023 but fell back by early February as new US economic data flummoxed analysts, who sent mixed signals into the market.
A surprising mix of strong wage data, labour market dynamics, inflation figures and retail sales suggested the American economy was robust enough to achieve the Fed’s above-target inflation levels. EURUSD started to retrace previous gains as a result.
‘Stronger American growth data blended with firmer inflation at the beginning of 2023 has added optimism to markets. Forex traders are now pricing-in a more hawkish outlook for Fed policy’.
Going back to February 2022, spiking oil prices were pushing the Euro toward multi-year lows as forex traders bet that the European Central Bank would delay plans to raise interest rates later in the year.
Prices for Brent Crude surged above USD 130 per barrel, the highest level for almost 13 years. Wholesale gas prices meanwhile more than doubled from the previous month on fears that the US and EU were considering an unequivocal ban on Russian oil.
The US did move forward with plans to ban purchases of Russian oil and gas, with other G7 countries following suit. European natural gas prices responded by hitting an all-time high.
In a note to investors, the FX Strategy unit at Crédit Agricole wrote that news of major Western importers considering coordinated sanctions against Russian energy exports sent oil and other commodity prices soaring, especially in Asia.
‘Conjecture around ramped up sanctions in the energy sector has started with a bang. Stocks have tumbled and crude prices are soaring on Asian markets as traders' price-in the impact of a US and EU ban on Russian crude supplies’.
In response to the supply shock, Crédit Agricole said a ‘binary move’ in currency markets was underway, one that favored the fiats of energy exporting countries. Net energy importing countries, in contrast, would see their currencies take a hit.
In a weekly currency research briefing note, Barclays said at the time that the Ukraine conflict had delivered a negative EUR shock.
‘In the near term, the Euro has scope to trade lower given the potential stagflation effect on the Eurozone. Looking further ahead, the war could compel more structural integration by member states that provides EUR with support.’
The Pound to Euro exchange rate reached 1.2177 on Tuesday 8th March, the highest level since June 2016. The Euro to Dollar rate dipped to 1.0857, the lowest level since April 2020.
Economists expected surging oil and gas prices to drag the Eurozone economy downward due to its reliance on Russian gas and deep integration with Russia's energy industry, a forecast that looks prophetic in hindsight.
In an interview with Bloomberg, an analyst from BMO Capital Markets European FX Strategy unit said that a negative relationship would strengthen between the price of crude oil and EUR/USD.
‘We believe forex traders will devote significant time this week to watching how these variables play out. The risk of an all-out EU ban on Russian oil imports will be one of the most important factors hanging over EUR/USD.’