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Preview this week: Focus on the Federal Reserve meeting minutes and pay attention to February PMI data from European and American countries

2024-02-19

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The U.S. dollar shines after an unexpected rise in inflation stickiness and awaits the latest Fed meeting minutes this week. In Europe, business investigations are crucial for the euro and pound. Data releases from Canada and Australia are also on the agenda.

Dollar on fire turns to FOMC meeting minutes

It's been a positive week for the dollar, which rallied after data showed U.S. inflation wasn't cooling as quickly as investors had hoped. Traders have since been forced to scale back bets on an imminent Fed rate cut.

Solid economic growth, a tight labor market and persistently high inflation are factors that make it difficult for the Fed to cut interest rates. The market finally got the news. The first rate cut has been postponed to June, and markets now expect a total of fewer than four rate cuts in 2024, down from six previously expected.

As the impact of interest rate cuts is digested, the U.S. dollar is starting to shine again, with the U.S. dollar index up 3% so far this year. It's worth noting that while stocks are buoyant, positive risk sentiment is usually bad news for the U.S. dollar, which is considered a safe-haven asset.

This makes the dollar’s recent rally even more impressive. The reserve currency has begun adjusting to its strong economic fundamentals, a process that may have room to continue as markets are still pricing in four rate cuts this year, while the Fed has signaled only three.

The minutes of the latest Fed meeting will be released on Wednesday (February 21), which will be the next piece of the puzzle. Investors will be looking for any clues on the potential timing of a first rate cut. Several Fed officials have spoken since the meeting, with most preaching patience on interest rates and warning against cutting rates prematurely given the strength of the U.S. economy.

If the minutes echo a similar tone, the dollar could gain more momentum.

Eurozone and UK business surveys ongoing

In Europe, the euro zone and the UK will release the latest round of PMI business surveys on Thursday. Both economies have been plagued by stagnant growth for some time, with the UK even slipping into a technical recession late last year.

Investors will carefully analyze these business surveys for signals on whether conditions are improving or worsening to gain insight into how quickly these central banks may cut interest rates. With UK inflation still very high, markets believe the Bank of England will be one of the last central banks to cut interest rates this cycle.

The concept has helped support sterling, which is now the second-best performing major currency this year after the dollar. The optimistic tone in global markets also played a role, as the pound was highly correlated with stock market performance due to the UK's twin deficits.

Of course, this is a two-way dynamic. If the stock market corrects or UK data continues to deteriorate, the pound will be vulnerable to a sell-off, especially if political uncertainty brews ahead of the election.

As for the Eurozone, although it narrowly avoided recession, the outlook is equally grim. New business orders have fallen for seven consecutive months, which is bad news for future growth. If the upcoming survey shows this trend continuing, the euro could take another hit as traders become more confident that the European Central Bank will cut interest rates in April.

Minutes of the latest European Central Bank meeting are also due to be released on Thursday, although the release does not typically have a major impact on markets.

Canada and Australia

Speaking of commodity-linked currencies, Canadian inflation data for January will be released on Tuesday. Inflation has cooled significantly in recent months, with core CPI falling to 2.6% in December, leading the Bank of Canada to abandon its tightening policy.

A renewed cooling in inflation could increase the likelihood of a spring interest rate cut, putting pressure on the Canadian dollar. National retail sales data for December will also be released on Thursday.

Finally, the minutes of the latest RBA meeting will be released on Tuesday, and fourth-quarter wage growth data will be released on Wednesday.

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

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Preview this week: Focus on the Federal Reserve meeting minutes and pay attention to February PMI data from European and American countries

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