
1. The US dollar index fell to lows last seen in June 2022, as the Federal Reserve nears its target terminal rate of 5%. This decline in the value of the dollar is also being driven by signs that the US economy is cooling, as Americans cut back on retail purchases, which make up a large proportion of economic activity. Slower growth could signal a more dovish Fed, which is why markets have not only priced in a terminal rate lower than the Fed’s projected 5%, but also expect unplanned rate cuts later in the year. This soft landing scenario for the US economy is characterized by inflation being eliminated through a shallow recession and a relatively quick economic recovery.
2. The Euro continued its climb, trading above $1.08 against the dollar, boosted by improving consumer sentiment and growing business activity. Unemployment in the Eurozone remained at a record low, which is a sign of a tightening job market. Inflation in the region also remained well above the ECB’s target of 2%, with the ECB indicating that it plans to raise rates by 50 bps in February and March. The combination of strong economic prospects and a hawkish ECB could see continued upside for the Euro, especially as the Fed signals that it is nearing the end of its tightening cycle. The ECB, on the other hand, is expected to maintain its current pace of tightening at least until the summer.
3. Sterling retraced to last month’s high of $1.24 against the US dollar, despite signs of slowing growth and increasing macroeconomic headwinds for the UK economy, seen through a decline in business activities and retail sales. Inflation in the UK slowed for the second consecutive month, though it remained above the Bank of England’s 2% target. BoE's Chief Economist, Andy Haldane, warned of persistent inflation stemming from full employment, with markets are now expecting a 50 bps rate hike at the next BoE meeting in February, which could push the pound higher.
4. The Australian dollar appreciated past $0.70, reaching its strongest levels in over five months, buoyed by higher-than-expected inflation data, the lifting of restrictions on Australian coal exports by China, and the Reserve Bank of Australia's efforts to reduce inflation through interest rate hikes. The release of recent inflation data has increased expectations for more aggressive tightening cycles by the RBA, with markets anticipating a rate hike in February. Strong domestic growth, supported by robust consumer spending and a tight labour market have also played a role in supporting the currency's rally.
Meanwhile, Kiwi Dollar rallied above $0.65 before paring gains towards the end of the month, on Jacinda Arden’s shock exit, low inflation, and anticipation of milder rate hike by RBNZ as inflation data fell short of RBNZ's forecast. Markets are now anticipating a rate hike of 50 basis points at the RBNZ's February's meeting. Elsewhere, the Canadian Dollar has been showing significant strength against the US dollar recently, with the Canadian economy being supported by increased demand from China and a rise in building permits. This strength was further fuelled by strong employment data, leading to increased bets on further tightening by the Bank of Canada and the likelihood of a rate hike at its next policy meeting.
5. On the other hand, Gold prices have been on the rise due to the weakness of the US dollar and expectations of a slower pace of rate hikes by the Federal Reserve. The price of gold reached above $1940 per ounce but then trimmed recent gains after minutes from the Fed's December meeting revealed plans to raise rates to control inflation. The outcome of the Fed's policy meeting in February, which is expected to result in a smaller 25 basis point rate hike, could drive gold prices higher. Despite this, the Fed remains committed to maintaining price stability, which may limit gold's short-term growth.
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