Economic Shifts: Inflation Declines, Currency Markets React

Inflation declines, currency trends, and key economic events shaping global forex markets. Stay updated with USD, GBP, EUR, JPY insights, and more.

Inflation expectations have continued their downward trajectory, easing from 3.3% in early 2023 to 2.1% by the final quarter of last year. The trend persisted into the first quarter of 2024, with expectations declining to 2.06%. Despite subdued economic activity and below-potential output, the New Zealand dollar (NZD) found support due to a weaker US dollar (USD), with NZD/USD climbing towards 0.5670 by midday in Asia.

Impact on European and US Markets

The British economy registered modest growth of 0.1% month-over-month in November, recovering from contractions in September and October. The services sector was the primary driver, with notable contributions from accommodation, food services, and telecommunications. With another projected 0.1% gain in December, GBP/USD has rebounded from its January low of 1.2100, trading above 1.2400 in mid-February.

In Switzerland, inflationary pressures have dissipated significantly, with headline and core CPI falling below 1% in the fourth quarter of 2023. January’s inflation figures will confirm further disinflation, potentially weighing on the Swiss franc (CHF). The USD/CHF pair remains buoyant and could reach 0.9200 by the week’s end.

The Dollar Index (DXY) and Key Economic Events

Key Events Today:

• Producer Price Index (PPI) – 1:30 pm GMT
• Unemployment Claims – 1:30 pm GMT

Following a stronger-than-expected Consumer Price Index (CPI) report, traders closely monitor the PPI release. Should wholesale price pressures remain elevated, demand for the USD could rise. Additionally, unemployment claims have decreased since December, indicating a stable labor market. Further declines in claims could bolster USD strength.

Economic Shifts: Inflation Declines, Currency Markets React

Central Bank Updates and Market Bias

Federal Reserve (USD)

The Federal Reserve voted to maintain its target rate between 4.25%-4.50% and continues to assess economic risks. Economists have revised growth forecasts 2024 to be higher by 2.5% from 2%. However, inflation remains slightly elevated, delaying potential rate cuts until 2025.

Next Fed Meeting: March 18-19, 2025 24-Hour Bias: Weak Bullish

Reserve Bank of Australia (AUD)

The RBA held its cash rate steady at 4.35% in December, marking the ninth consecutive pause. Inflation has moderated but remains above target, with underlying inflation at 3.5%. Growth remains sluggish, with GDP increasing only 0.8% over the past year.

Next RBA Meeting: February 18, 2025, 24-Hour Bias: Weak Bearish

Bank of England (GBP)

The Bank of England reduced rates by 25 basis points to 4.50% in February 2025. Inflation remains above 2% but will stabilize. GDP growth has been weaker than projected, though the labor market remains balanced.

Next BOE Meeting: May 8, 2025, 24-Hour Bias: Weak Bearish

European Central Bank (EUR)

The ECB cut rates by 25 basis points on January 30, 2025, bringing the main refinancing rate to 2.90%. The disinflation process is on track, with inflation expected to reach the 2% target by year-end.

Next ECB Meeting: March 6, 2025, 24-Hour Bias: Weak Bearish

Swiss National Bank (CHF)

The SNB lowered its policy rate by 50 basis points to 0.50% in December, marking its fourth consecutive cut. Economists have revised inflation forecasts downward, signaling continued policy easing.

Next SNB Meeting: March 20, 2025, 24-Hour Bias: Medium Bullish

Bank of Japan (JPY)

The BOJ maintained its overnight call rate at 0.5% in January while planning gradual reductions in JGB purchases. Inflation remains moderate, with services prices rising amid steady wage growth.

Next BOJ Meeting: March 19, 2025, 24-Hour Bias: Medium Bullish

Market Outlook for Major Currencies

• NZD/USD: Supported by a weaker USD, trending towards 0.5670
• GBP/USD: Recovering from January lows, trading above 1.2400
• USD/CHF: Strengthening on weaker Swiss inflation, eyeing 0.9200
• EUR/USD: Facing headwinds amid weak industrial production data
• USD/JPY: Pushing towards 155 on rising US-Japan bond yield spreads

Conclusion

With inflation expectations easing and central banks adjusting their monetary policies accordingly, global forex markets are experiencing significant fluctuations. The USD remains focused, with key economic releases such as PPI and unemployment claims influencing short-term direction. Traders should prepare for potential volatility across major currency pairs as markets react to shifting economic fundamentals.

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