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Unlike 2023, 2024 is gearing up to be a central bank easing theme: how long central banks will remain at their terminal levels and, importantly, which central bank snaps first and begins cutting their benchmark rate. Considering this, the FP Markets Research Team joined forces to throw light on three major currency pairs to consider potentially adding to your watchlist this month.
It would be remiss of the Research Team not to include the EUR/USD on this list, a currency pair containing two of the largest economies in the world and, by extension, two of the most widely traded currencies globally.
The Federal Reserve (or Fed) recently communicated they project three rate cuts this year through their latest Summary of Economic Projections (SEP), though market pricing (futures) forecasts double that at over six rate cuts (159bps), starting as early as May’s policy meeting, with a 55% probability for a cut currently priced in for as soon as March’s meeting. This disparity between the markets and the Fed seems a little extreme for an economy (US) displaying resilience and sticky inflation.
The European Central Bank (ECB) echoes a similar vibe to the Fed rate pricing; according to the OIS swaps market, nearly 150bps of cuts are priced in by the year's end, with April’s meeting fully priced for a 25bp cut. The ECB rate announcement is due on 25 January, and the FOMC claim the spotlight on 31 January. Expectations for both central banks are to remain on hold at the upcoming meetings.
Ultimately, it appears that the market will continue to sell the buck on negative news, with only moderate bids on positive news. Yet, it would not be surprising to see markets pull back on rate cuts and underpin the buck, given recent CPI inflation for the US showing a mild uptick for the month of December (we saw an increase in headline year-on-year inflation), headline non-farm payrolls jumping by 216,000 in December (north of the economists' estimates) and economic growth increasing at a 4.9% annualised rate for Q3 (down from 5.2% in the preliminary estimate).
From a technical perspective for the EUR/USD, this shows that the currency pair’s longer-term trend is to the downside and has been since mid-2008. Resistance is on show at $1.1233 and scope is seen to push lower as far south as support coming in at $1.0516.
Meanwhile, on the daily timeframe, price movement is showing early signs of a downtrend (recent lower low) but is testing the 50-day and 200-day simple moving averages (SMAs) at $1.0893 and $1.0845, which could offer this market some support. You will also note that the two SMAs produced a Golden Cross in recent trading, a signal that a longer-term bullish uptrend could be on the table. Therefore, for now at least, the daily timeframe could draw in bullish interest despite the longer-term downtrend facing south.
The USD/JPY ended 2023, printing a third consecutive year in the green, adding +7.5%.
Ultimately, economists are anticipating the Bank of Japan (BoJ) to exit negative interest rate policy (NIRP), which should, theoretically, keep the Japanese yen (JPY) underpinned. The issue here, of course, is the timing of the BoJ. With that in mind, the Fed, as we already know, is anticipated to begin cutting rates as early as March’s policy meeting, but that could well change, as noted above.
From a technical standpoint, however, the USD/JPY is in a clear long-term uptrend and not showing any signs of slowing down soon. As evident from the monthly timeframe, resistance at ¥150.80 has proven a solid ceiling, with the second test of the level being accompanied by a channel resistance extended from the high of ¥125.85 and negative divergence from the Relative Strength Index (RSI). Consequently, this remains a meaningful hurdle for the currency pair to overcome if the unit wants to navigate higher terrain. Monthly support, on the other hand, can be seen at ¥138.42.
From the daily timeframe, we can see that price action recently crossed swords with resistance at ¥148.22, comfortably above the 50-day SMA at ¥146.34. Should the price overthrow current resistance, as the monthly timeframe suggests, the pair is likely headed for the monthly resistance mentioned above at ¥150.80.
Recent UK data showed inflationary pressures increased in the twelve months to December. Headline year-on-year inflation rose to 4.0%, surpassing 3.9% in November and exceeding the 3.8% market consensus. For core inflation, we remained unchanged at 5.1% in the twelve months to December, which exceeded the 4.9% median estimate. Notably, core services CPI also rose to 6.4% for December year on year, against 6.3% prior, which, of course, will concern those at the Bank of England (BoE). The latest data follows UK jobs numbers, showing unemployment steady at 4.2% in the three months to November and wages for November (3m YoY) falling to 6.8% (including bonuses) and, as expected, at 6.6% for pay excluding bonuses.
This will not be welcomed news for the BoE and increases the likelihood of the central bank having to keep the Bank Rate in restricted territory for longer than anticipated. According to market pricing (OIS), 131bps of cuts are priced for the year following the release. Evidently, a moderate hawkish repricing was observed; June’s policy meeting is now fully priced for the first rate cut (44bps), whereas prior to the event, May’s policy meeting was all but fully priced in for the first 25bp cut. This has also seen the GBP/USD catch a strong bid.
From a technical side of things, nonetheless, we have an interesting landscape to work with. The 3-month chart shows downside momentum slowing and longer-term price action in the process of forming positive divergence (price establishing lower lows but the Relative Strength Index [RSI] forming higher lows). However, the monthly chart shows price tackling resistance at $1.2715; a break higher (lower) from here could see the pair target resistance (support) at $1.3111 (at $1.2173). Over on the daily timeframe, upside momentum has evidently slowed, visible not only through price action but also confirmed through the RSI, demonstrating negative divergence. Trend studies show a series of higher highs and higher lows unfolded since bottoming in October 2023 (uptrend), but we also recently observed the pair form a fresh lower low beyond the $1.2607 2 January low, which indicates an early downtrend.
Based on the analysis, the hawkish repricing for BoE rate cuts may continue to bolster the GBP until fresh data emerges. Whether this will be enough to break monthly resistance at $1.2715 is difficult to estimate at this point. Should price engulf the aforementioned level, this would be considered a bullish cue for the pair where all three timeframes (3-month, monthly and daily) will be aligned with the current macro picture.
The information contained in this material is intended for general advice only. It does not take into account your investment objectives, financial situation or particular needs. FP Markets has made every effort to ensure the accuracy of the information as at the date of publication. FP Markets does not give any warranty or representation as to the material. Examples included in this material are for illustrative purposes only. To the extent permitted by law, FP Markets and its employees shall not be liable for any loss or damage arising in any way (including by way of negligence) from or in connection with any information provided in or omitted from this material. Features of the FP Markets products including applicable fees and charges are outlined in the Product Disclosure Statements available from FP Markets website, www.fpmarkets.com and should be considered before deciding to deal in those products. Derivatives can be risky; losses can exceed your initial payment. FP Markets recommends that you seek independent advice. First Prudential Markets Pty Ltd trading as FP Markets ABN 16 112 600 281, Australian Financial Services License Number 286354.
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