The USD bounced back after Tuesday's PMI slump, surprising markets with diverging business surveys compared to Europe. This raised doubts about the idea of US economic superiority, but didn't significantly change the monetary policy outlook. Money markets still anticipate less than two quarter-point rate cuts by the Federal Reserve (Fed) this year, with even a slim possibility of a hike.
While soft data like PMI surveys offer insights into economic trends, they haven't been as influential on markets as hard data, particularly inflation and employment reports. Therefore, today's US GDP figures, Friday’s PCE inflation report, the upcoming Fed meeting, and jobs data next week will play crucial roles in determining whether the Fed maintains its current policy stance, potentially keeping rates higher for longer and sustaining the dollar's strong performance in 2024. The USD is expected to continue benefiting from its status as a high-yielding, high-growth, commodity-backed safe haven currency. However, this week's price movements, combined with the overcrowded speculative bets on USD appreciation, raise doubts about the extent of further USD gains, especially with USD/JPY hitting fresh 34-year highs amid growing concerns about Japanese intervention.
Historically, current levels of core, medium, and trimmed inflation momentum have been associated with Fed rate hikes rather than cuts. Options markets now indicate approximately a one in five chance of a US rate hike within the next 12 months. If this probability increases or if there's another external shock, such as heightened geopolitical tensions in the Middle East, demand for the dollar will likely remain strong.
GBP maintained its recent gains against the EUR and USD yesterday, buoyed by a survey indicating that British manufacturers are gearing up to increase output in the coming months, driven by growing confidence. GBP/EUR has climbed back above its 200-day moving average support level, although it remains nearly 1% below last week's peak of €1.1735. Meanwhile, following its strongest daily surge of 2024 on Tuesday, GBP/USD is edging closer to $1.25.
The Confederation of British Industry’s (CBI) quarterly Industrial Trends survey revealed that business optimism reached its highest level in almost three years, while sentiment within the manufacturing sector improved significantly, with output expectations hitting a six-month high. However, pressures on prices continued to mount, with the corresponding index reaching its highest level since February 2023. While this data didn't significantly impact the pound, coupled with the positive UK PMI surveys earlier in the week, it suggests a brighter economic outlook for the UK in the long run, which should support the sterling. However, in the short term, a growing disparity in the interest rate outlook between the UK and US could weigh on GBP/USD. Currently, less than two 25 basis point rate cuts are anticipated by both central banks, but there's potential for a more dovish repricing by the Bank of England (BoE), particularly if it acts before the Federal Reserve, a scenario that is becoming increasingly plausible.
