On Friday (January 6), the U.S. dollar index fluctuated and climbed this week, and it is bound to rise for two consecutive weeks. A string of strong jobs data underscored the still-tight U.S. labor market, which could force the central bank to maintain an aggressive path of rate hikes as it struggles to bring down stubbornly high inflation. Meanwhile, lingering fears of a global recession have also fueled safe-haven demand for the dollar.
In other non-U.S. markets, the euro fluctuated against the U.S. dollar this week, mainly due to the strong U.S. dollar, and the fall in European inflation also put pressure on the euro. The pound fell against the U.S. dollar this week, and the strong U.S. dollar put pressure on the currency pair, but British inflation may continue to climb to limit the fall of the pound. Looking forward to next week, European and American investors will gradually return from the Double Day holiday. A series of intensive economic data releases, focusing on China’s inflation and trade balance, the United States, Australia and Japan’s Tokyo CPI data. Next, let’s take a look at the factors that affect the trend of several major currency pairs this week.
The U.S. dollar index fluctuated and climbed this week. The U.S. economic data this week was generally strong, and the Federal Reserve released a hawkish tone. At the same time, concerns about a global economic slowdown supported the safe-haven U.S. dollar
Figure: US index daily chart trend
Analysts at Brown Brothers Harriman pointed out that the dollar is too weak at the end of 2022, and the dollar will recover most of its losses in the coming weeks and months. Notably, ECB and BOE policy tightening expectations have declined in recent days, and we see room for Fed tightening expectations to rise, especially after the strong message contained in the FOMC meeting minutes.
Overall strong U.S. economic data this week supported the dollar
The overall performance of the US non-farm payrolls report in December was relatively strong. Specific data show that the number of non-agricultural employment in the United States increased by 223,000 in December, which was higher than the expected increase of 200,000. The previous value was revised down from an increase of 263,000 to an increase of 256,000; And the previous value of 0.2 percentage points; the annual rate of wages in the United States recorded 4.60% in December, significantly lower than the expected value of 5% and the previous value of 5.1%.
Some analysts pointed out that all signs indicate that the labor market remains strong, and employers in the hospitality industry are unable to recruit people even after wages rise.This pattern has been and will continue for some time
U.S. employment data released by the Automatic Data Processing (ADP) was strong. Data show that in December last year, the number of private sector employment in the United States increased by 235,000, far better than market expectations of 150,000, and an increase of 182,000 in November.
ADP’s chief economist said the labor market was strong but fragmented, with hiring varying widely across industries and firm sizes. Business units that went on a hiring spree in the first half of 2022 have slowed hiring and, in some cases, cut jobs in the final month of the year. The ADP report suggests that many companies are still hiring and the labor market remains strong. That makes it harder for the Fed to reduce inflation, as labor shortages push up wages.
According to a survey released by S&P Global Market Intelligence, the final value of the Markit services PMI in the United States in December fell from 46.2 in November to 44.7, the lowest since August 2022, better than the expected 44.4. The composite PMI final value dropped to 45 from 46.4 in November, and the initial value was 44.6.
Commenting on the final services PMI, Sian Jones, senior economist at S&P Global Market Intelligence, said companies continued to hire workers despite weak demand. A noteworthy development is the notable easing of inflationary pressures across the private sector. Low demand for inputs led to the least pronounced rise in costs in more than two years, while increases in selling prices slowed as companies sought to lure customers and boost sales. Cost savings passed on in the form of customer discounts could herald further inflation adjustments as we move into 2023.
Data released by the U.S. Department of Labor on Thursday showed that as of December 31, the number of initial jobless claims was 204,000, better than market expectations of 225,000, and the previous week’s data was 223,000. The number of Americans filing new claims for unemployment benefits fell to a three-month low last week and layoffs plunged 43 percent in December, suggesting the labor market remains tight and could force the Federal Reserve to keep raising interest rates.
The Fed continues to release a hawkish tone, supporting the dollar
Minutes of the Fed’s Dec. 14-15 meeting released showed most participants were encouraged by easing inflation in October and November, but agreed that “more substantial evidence” of progress was needed to confirm the downward path . Participants agreed that the Fed made significant progress in shifting to a sufficiently restrictive monetary policy stance last year. Most participants noted that upside risks to inflation remain a key factor affecting the outlook for monetary policy. Some participants argued that inflation risks could be more persistent, while some argued that inflation risks were more balanced.
“Our view remains that a rapid easing of inflation, coupled with a notable slowdown in job growth, would make a big difference in the first half of the year, with the last 50 basis points in the first quarter,” said Capital Economics chief North America economist. With the Fed funds rate peaking near 5% following the Fed’s rate hike, we still expect the Fed to resume cutting rates before the end of the year.
Commenting on the minutes of the Fed’s December policy meeting, analysts at TD Securities noted that officials still generally believed there was a need to move the policy stance further into a restrictive range in the near term. As a result, the Fed is expected to hike rates by another 50 basis points in February and 25 basis points in March and May. Therefore, the Fed is expected to determine the final target range for the federal funds rate at 5.25%-5.50% by May.
Minneapolis Fed President Neil Kashkari said the central bank must avoid cutting policy rates too early to avoid another surge in inflation. It would be appropriate to continue raising rates for at least the next few meetings until there is confidence that inflation has peaked. Evidence is mounting that inflation may have peaked. The Fed should keep its target rate on hold and said his forecast would be 5.4%. We don’t know if that’s high enough before the Fed pauses for a reasonable amount of time. Once the Fed takes policy lags into account, it can assess whether rates need to rise or remain at peak levels for a longer period of time. Any sign of slow progress in reducing inflation at this stage could lead to a sharp increase in policy rates. The Fed will only consider cutting rates if it is confident that inflation is falling back to its 2% target.
Kansas City Fed President Esther George said the Fed will be key once rate hikes are over. I’m in favor of a rate above 5% and keep it there for a while. High inflation calls for action by the Fed. Fed policy is having an impact on demand. The Fed will maintain interest rates until 2024. Instead of predicting a recession, there are risks. When the Fed raises rates, economic risks rise. Recent inflation data have shown promising signs of easing pressures. It is important for the Fed to continue shrinking its balance sheet. The Fed still has a lot to learn about how balance sheet policy works.
St. Louis Fed President James Bullard said the new year could finally see some welcome relief on inflation. Changing the Fed’s inflation target is a ‘bad’ idea. The outlook for the global economy is bleaker than what we see now. It takes longer periods of high interest rates to keep pressure on prices. It would be good for the Fed to quickly adopt a restrictive stance. It is too early to say when the Fed will adjust its balance sheet reduction policy. The Fed will review its balance sheet strategy later this year. The shrinking of the Fed’s balance sheet has worked well so far. A further six to 12 months of unwinding may be required before the balance sheet strategy is reassessed. A strong job market means a good time to fight inflation. The data will determine whether to raise rates by 25 or 50 basis points at the next meeting. The job market will remain resilient in 2023, and the job market remains fairly strong.
Atlanta Fed President Bostic reiterated that inflation is the biggest headwind to the U.S. economy and that Fed policy makers remain determined to beat it. In his brief opening remarks at the Atlanta Fed’s research conference, Bostic said recent reports showed the Fed’s preferred inflation measure at 5.5%; U.S. inflation was too high and despite signs that prices were slowing, there was still “a lot of There is work to be done”; the Fed is committed to using its tools to bring down inflation; officials “remain determined” to beat inflation.
Global recession fears linger, support safe-haven dollar
Fears of a global recession also supported the dollar. Purchasing managers’ indices from the U.S. and China point to a slowdown in both economies.
After China suddenly changed the zero crown policy on December 7, the new crown epidemic worsened. China’s official December manufacturing and non-manufacturing PMIs were both lower than expected, and fell below the lows during the Shanghai lockdown period from April to May 2022. fell to its lowest level since February 2020. Affected by the new crown epidemic, year-on-year GDP growth is expected to slow to 2.2% in the fourth quarter of 2022 from 3.9% in the third quarter of 2022. The GDP growth forecast for 2022 was lowered to 2.8% from 3.3% previously. Challenges posed by China’s coronavirus pandemic and reopening weighed on market sentiment, sources said. At the same time, the U.S. manufacturing and non-manufacturing PMI in December also fell to a new low in many years, below the 50 level of the expansion and contraction line.
However, the market remains optimistic about China’s future prospects. The Chinese government’s marked acceleration in reopening the economy will boost economic activity and lead to upward revisions to gross domestic product (GDP) forecasts. China’s National Bureau of Statistics has revised China’s real GDP growth rate to 8.4% in 2021 (previously 8.1%), making the base for GDP growth in 2022 rise.
Based on the earlier-than-expected reopening of China’s borders, this could fuel a stronger economic rebound this year after herd immunity is achieved. China will reopen its borders from January 8. Some market analysts raised their 2023 GDP growth forecast to 5.2% from 4.8% previously.
Meanwhile, U.S. manufacturing activity showed further weakness late last year and the Federal Reserve kept interest rates high for some time, fueling recession fears. U.S. manufacturing activity will gradually cool in 2022 as demand for goods falls as borrowing costs rise and consumer spending shifts toward services.
In this scenario, manufacturing output is expected to fall further in the coming months as the impact of higher interest rates continues to play out, economists said. In the minutes of the meeting, the Fed specifically emphasized that it will not start a cycle of interest rate cuts in 2023 because it is worried that a premature shift to an easy policy environment will make its struggle with inflation more troublesome. That in turn means the Fed’s current policy cycle could peak in interest rates higher than previously estimated, potentially weakening growth.
The euro fell against the U.S. dollar this week, mainly due to the strong U.S. dollar, and the fall in European inflation also put some pressure on the euro
Chart: EUR/USD daily chart
Inflation in the euro zone fell, which slightly weakened the European Central Bank’s hawkish tone and put pressure on the euro.Inflation in the European region may have peaked, raising hopes that the European Central Bank may adopt less hawkish policy, which in turn would support a stronger economy.
Ray Attrill, head of foreign exchange strategy at National Australia Bank, said: “The low inflation data and all the surprises seem to be weighing on the euro. But from a terms-of-trade perspective, the recent weakness in oil and gas prices is actually very positive for the Eurozone growth outlook…so I would actually expect more support for the euro.
The market is more hopeful that the worst consumer price surge in the euro zone’s history has peaked. The latest data released by Eurostat on Friday said inflation in December was 9.2% (year-on-year), mainly due to slower growth in energy costs. The figure reflects slower price growth in countries including Germany, France, Italy and Spain. The latest inflation figure was below the 9.5% consensus estimate by economists.
With the addition of Croatia, the number of countries in the euro zone rose to 20 from 19 this month. Before that, the German government paid the gas bills of some German households to buffer energy prices that have continued to soar since the Russia-Ukraine conflict.
The European Central Bank’s interest rate hike expectations will not be cooled because of the fall in inflation.While a slowdown in inflation in the continent’s largest economy and elsewhere will boost market optimism, it may not dampen expectations for rate hikes by the European Central Bank – which last month pledged to raise deposit rates below the current level of 2%. superior. At present, many members of the European Central Bank’s Governing Council expect the pace of interest rate hikes in February and March to maintain the pace of 50 basis points.
BI senior economist Maeva Cousin said a rise in core inflation would exacerbate the ECB’s Governing Council’s concerns about the persistence of inflation. If these pressures continue to be confirmed in 2023, the rate hike cycle is likely to extend into the second quarter. “
ECB Vice President Guindos said in late December that a 50 basis point rate hike at this month’s meeting could become the “new normal” as central bankers continue to fight soaring inflation. Guindos said: At least in the short term, 50 basis points of interest rate hikes may become the new normal. What we can expect is that the ECB will continue to raise interest rates at this pace for some time.
Governing Council member and Bank of France Governor Villeroy de Gallo has said borrowing costs may not peak until this summer. “We will then stand ready to maintain this terminal rate for as long as necessary,” he said in Paris on Thursday. The sprint to hike rates in 2022 is more of a long run, and the duration is at least as important as the level of hikes.
Inflation may be falling across Europe, but is well above the central bank’s 2% target. ECB Governing Council member Martins Kazaks expects further sharp rate hikes at the next two meetings in February and March. Martins Kazaks is the head of Latvia’s central bank, where inflation is running at 22 percent and remains near that level.
Bets on a peak in deposit rates were largely unchanged on Friday among money market traders, betting on a further tightening of about 152 basis points by mid-2023.
European Central Bank President Christine Lagarde warned against focusing on changes in Europe’s headline inflation rate, emphasizing earlier: “We cannot hang on to one number because there are good reasons to believe that price increases will resume again in January.” pick up.
Persistently high underlying inflation will keep interest rates elevated, following hikes in February, March and possibly even in the second quarter, economists at ING said. The ECB is starting to shift its focus from headline inflation to core inflation and wage growth. This will be the reason for the ECB to insist on not cutting interest rates in the short term.
In the short term, the unseasonably warm weather eased concerns about energy shortages and pushed benchmark European gas prices down to pre-Russia-Ukraine conflict levels. But given that the euro zone is expected to experience only a short and mild recession for now, demand levels, as well as inflation, are likely to remain firm.
The pound fell against the dollar this week, and the strong dollar put pressure on the currency pair, but British inflation may continue to climb to limit the fall of the pound
Chart: GBP/USD daily chart
UK inflation and wages are likely to continue to climb, supporting the Bank of England’s hawkish tone.Adding to concerns about upward price pressures, the Bank of England said business leaders expect inflation to accelerate and wage growth to strengthen in coming years. The Bank of England said its monthly survey of business policymakers showed expectations for the UK consumer price index (CPI) for the year ahead rose to 7.4% last month from 7.2% in November; wage expectations rose 0.5 percentage points to 6.3%.
Policymakers said they were concerned about the persistence of inflation expectations in the economy after CPI surged to a 40-year high last year. While the BoE expects interest rates to fall sharply later this year, persistent price pressures could push that outlook away from the central bank’s 2 percent target.
Economists Ana Andrade and Dan Hanson said the December 2022 survey by the Bank of England’s closely watched panel of policymakers would make it harder for the central bank to ease the pace of tightening again in February. Our base case was for the Bank of England to raise interest rates by 25 basis points in February this year, but today’s survey showed that medium-term inflation expectations are rising, as are wage growth over the coming year, adding to the case for another rate hike next month. 50 basis point possibility.
The survey also showed that fewer companies reported hiring difficulties, suggesting labor market tensions that have driven up wages may be starting to ease. A full 71% of companies said they had difficulty hiring in the last month, down from 78% the previous month.
The Bank of England said businesses expected higher interest rates to lead to lower investment and employment next year. Compared with the scenario of no rate hike, companies may reduce investment by 8% and employment by 2%, according to the survey.
To control inflation, the Bank of England raised its key interest rate by 50 basis points to 3.5% in December, the highest level since October 2008. The country’s CPI rose by 10.7% year-on-year in November, down from the 41-year high of 11.1% in October, but still at a fairly high level.
The Financial Times’ annual survey of 101 leading economists in the country showed that a large majority believed the inflation shock from the coronavirus pandemic and the Russia-Ukraine conflict would last longer in Britain than elsewhere, This will force the Bank of England to keep interest rates high while the government implements tight fiscal measures.
The continued downturn in the British economy will limit the continued rise of the pound.Economists expect Britain to suffer an economic contraction almost as deep as Russia’s in 2023 as a sharp fall in household living standards weighs on economic activity.
In its 2023 macro outlook, Goldman Sachs predicts that the UK’s real gross domestic product (GDP) will shrink by 1.2% in 2023, far below the growth rate of other major economies in the Group of Ten (G10). The investment bank also expects the UK economy to grow by 0.9% in 2024.
Goldman Sachs acknowledged in the report that its forecasts for the U.K. economy were below the market consensus of a 0.5% contraction this year and a 1.1% expansion next year. However, the Organization for Economic Cooperation and Development (OECD) also believes that the UK’s growth rate in the next few years will lag far behind other developed countries. Despite facing the same macroeconomic headwinds, the UK will perform more like Russia than any other G7 member.
Hatzius, chief economist at Goldman Sachs, and his team concluded that both the euro zone and the UK are now in recession because both have suffered “larger and longer-term increases in household energy bills” that would leave their peak inflation rates higher than those in the U.S. All other economies are higher.
And high inflation is bound to in turn put pressure on real income, consumption and industrial production. We expect real incomes in the euro area to continue to fall by 1.5% in the first quarter of this year, and a further 3% in the UK in the second quarter, before recovering in the second half of the year.
The Office for Budget Responsibility (OBR) has previously forecast that the country will face its worst ever drop in living standards, with real household disposable income in the country set to fall by 4.3% in the 2022-23 financial year.
Similarly, consultancy KPMG expects the UK to experience a relatively mild and prolonged recession, with real GDP expected to shrink by 1.3% in 2023 and grow by 0.2% in 2024. Shrinking incomes have been cited as the main cause of the recession, as higher inflation and interest rates have slashed households’ purchasing power.