USD dollar on track for first 3-week rally in 6 months: The Week Ahead

The US dollar is on track for its best three-week run in six months. Whilst the dollar index shows to the potential to pause for breath, a strong set of CPI, flash PMI and GDP figures next week could see the USD extend its dominance.

The week that was:
The week ahead (calendar):
The week ahead (key events and themes):

US dollar technical analysis (daily chart):

Last week I highlighted that the US dollar index was trading in its smallest weekly range since September 2021, but favoured an upside breakout given overly-dovish market pricing for the Fed. We can see that the market clearly broke higher this week as Fed officials pushed back on rate cuts, and I see further potential for a higher dollar in the weeks ahead.

However, the daily chart shows that a bearish pinbar taped the upper Keltner channel on the daily chart, and a spinning top doji then formed to show the market is entering a period of consolidation. I do not think this rally is over, but I do suspect it needs a break before its next leg higher. The question now is whether it will provide a sideways consolidation, or a minor pullback before enticing bulls back to the table.

Looking through the calendar, the best US dollar bulls could wish for is a strong set if flash PMI data coupled with a decent Q4 GDP print.

The week that was:

FOMC voting member Christopher Waller pushed back on imminent rate-cut expectations, saying easing should only take place when the Fed are confident that lower levels of CPI will be sustained
Inflation data for the UK and Canada were higher than expected. Whilst it isn’t likely to spur another hike from the BOE or BOC, it’s more data which strains the case for multiple central bank cuts this year
Australia’s December employment figures threw a curveball with a -64.5k job growth print (and a -106.6k full-time print). The question now is whether this is a blip, or the start of a trend. Either way, peak cycle seems to have already arrived
China marginally beat their 2023 growth target of 5%, although analysts were quick to point out their economy ‘recovery’ has been patchy and the property crisis is still unfolding
Wall Street indices and US yields rose on Wednesday as the US government averted a government shutdown until March, pushing the Nasdaq to a record high
Speculation that China’s state-backed pension funds were active in the ETF space on Wednesday saw APAC stock catch a late bid
OPEC and the IEA upgraded their oil demand forecasts for 2025

The week ahead (calendar):

The week ahead (key events and themes):

US PCE inflation
Central Bank interest rate decisions from ECB, BOJ and ECB
Flash PMI reports
US GDP
US Earnings

US PCE inflation

With headline inflation beating expectations for the US two weeks ago, all eyes will be on the PCE inflation measures next week to see if they follow suit. Keeping in mind that core PCE is the Fed’s preferred inflation gauge but it is also less volatile. So it may take less of a miss or a beat to move markets. We can see that the rate of PCE inflation has been falling steadily towards the Fed’s 2% target, and the closer it moves there next week the more vindicated the traders who are calling for multiple Fed cuts will feel. And that could surely weigh on the US dollar and support Wall Street (and likely hit Nasdaq to a fresh record high). Conversely. A hotter-than-expected set of numbers could further support the US dollar and weigh on appetite for risk.

Trader’s watchlist: EURUSD, USD/JPY, WTI Crude Oil, Gold, S&P 500, Nasdaq 100, Dow Jones

ECB interest rate decision, Lagarde speech

If recent comments from ECB members are anything to go by, expect nothing exciting in regards to any clues for looser policy. A few members this week have joined the chorus of central bank members to push back on rate cuts happening any time soon. There’s always the speech from Lagarde, but that tends to provide more confusion than anything concrete. Still, if something were to slip and markets perceive a hike before the summer, it could help support the euro and weigh on the DAX.

Trader’s watchlist: EURUSD, EUR/JPY, EUR/CHF, GBP/EUR, DAX, CAC, STOXX

BOJ interest rate decision

The Bank of Japan – the central bank which rarely changes policy – but when they do, you wish you had been paying attention. In Q4 there had been a growing expectation for the BOJ to begin dismantling their ultra-dovish policy in the first half of 2024, with some speculating late Q1. Yet incoming economic data is providing little reason for them to do so. The rate of inflation continues to soften, and wages – a metric the BOJ really want to see increase for sustainable inflation – rose just 0.2% y/y in November. As my colleague David Scutt pointed out, “If the Bank of Japan (BoJ) was looking for evidence of growing wage pressures to justify abandoning negative interest rates, it wasn’t found in the latest government [wages] report for November”. So odds favour another meeting of inaction next week or clues of such in the subsequent minutes. And in all likelihood, we’ll need to wait for the annual wage negotiations to conclude on March 31^st to see if there is any “hope is there are clear signs that wages growth will be sufficient enough to make the inflationary impulse permanent“.

Trader’s watchlist: USD/JPY, AUD/JPY, GBP/JPY, EUR/JPY, Nikkei 225

View related analysis:

USD/JPY: Japanese wage growth slumps in blow to BOJ’s rate hike ambitions

Flash PMIs

Flash PMIs from S&P Global provide a forward look at lagging GDP figures. The easiest way to look at next week’s data points (particularly in the US) are to see if they beat expectations, as this could cause further dollar shorts to cover as they realise the Fed are nowhere near loosening rates.

If we look at composite PMIs below, it could be argued that they have all troughed and could move higher over the coming months. And as higher growth is inflationary, it further pushes back on aggressive dove poisoning against central banks.

Trader’s watchlist: EURUSD, USD/JPY, AUD/USD, GBP/USD, EUR/GBP, WTI Crude Oil, Gold, S&P 500, Nasdaq 100, Dow Jones,

US earnings:

Tuesday: General Electric (Blue Chip, #55 Mkt Cap)
Tuesday: Johnson & Johnson (Consumer, # 17 Mkt Cap)
Tuesday: Procter & Gamble (Consumer, # 19 Mkt Cap)
Tuesday: Verizon (Telecommunication, #42 Mkt Cap)
Tuesday: Netflix (Consumer, FAANG, # 19 Mkt Cap)
Wednesday: Tesla (Automaker, Tech, Mkt Cap #8)

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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