Howsoever the markets may want to deny, Narrative still is about High geopolitical uncertainty, the still-unfolding impact of aggressive monetary tightening, fiscal policy in many economies gradually becoming more restrictive, and a long list of structural transitions. But the prospects rate cuts by Fed continue to overwhelm the negatives.
We all know that the Central bankers missed inflation upswing; obviously they should want to be fully sure of the inflation downswing and hence will prefer to be staying well behind the curve.
Moreover, the Financing conditions have eased in both US and EZ since early December, doing the work actual rate cuts would do: supporting growth and pushing up inflation risks. Consequently, the more aggressive the market prices future rate cuts, the less needed those cuts will be.
U.S. published December deficit of $129 billion, up 52% from the previous year. The period between Oct and Dec 2023 showed deficit at staggering $510 billion. Deficits are not a tool for growth; they are tools for stagnation. The massive deficit means more taxes, persistent inflation and lower growth.
Recent gains in EUR/USD during Q4 of 2023 disproportionate when compared to the evolving growth landscape - 5-year real EUR-USD rate spread—indicate EUR/USD is currently trading at higher level than what relative ECB-Fed outlook would justify.
With 'at-least-things-are-not-getting-any better -in-the-eurozone' scenario, Prudent to have sell-on-rallies approach to EUR/USD,
Taiwan re-elected a DPP President - China continues its barrage of balloons violating Taiwan’s territorial airspace in an effort to test Taiwan’s responses & wear down its threat awareness.
PBoC Ex- official says China’s property downturn may continue for two more years. New-home sales nationwide will likely shrink by another 50 million sqm both in 2024 and 2025.
UK activity data was quite mixed, but there was a slightly better set of trade figures which may have helped sterling. Well-tested Dec/Jan range base around 1.2610 is key support. Growing perception that BOE might be less aggressive with cuts.
Yield on the 2-year JGB dropping back under zero - you can still get a 5%+ carry on long USD. Imminent Break above 146.60/147.40 for testing 2023 CY highs.
Interest rates anchored to West and exchange rate anchored to East- no early respite from this twin anchor as extension indicates acceptance.