The European currency market starts the day on the defensive. Asian stocks are falling due to increased weak sentiment in China. From what we know, it seems that a new list of specialized financing for real estate developers announced by one of the Chinese banks has raised some doubts about an easing of credit conditions. USD/CNH has traded at 7.20 (the high of a two-month trading range) and a weaker renminbi has taken Asian currencies down with it. Developments in the Middle East are also being followed cautiously, although it is important to say that the energy markets remain quite orderly and that European natural gas has fallen below EUR 30/Mwh, a very welcome development for the European industry.
Looking ahead to the day ahead, what catches our attention is a speech at 5:00 pm CET by the Federal Reserve’s Christopher Waller. Let us remember that he gave the definitive and moving “something seems to be giving” speech in end of november. At the time, he concluded that the conflict between strong American growth and disinflation seemed to be resolved in favor of disinflation. The speech provided an important indicator of the Fed’s dovish turn at the December FOMC meeting. Today we assume that you will stick to the same core message of successful disinflation and will not want to get involved in adjusting the discussion of an easing cycle for 2024, but not from March. Therefore, we consider event risk to be benign: slightly negative for the dollar and positive for risk.
We also highlighted an overnight report by the Wall Street Journal’s Nick Timiraos that the Fed could consider slowing its quantitative tightening plan ($60 billion in U.S. Treasuries currently leaving the Fed’s balance sheet every month) in the next meetings. It’s unclear whether this could be on the agenda for the Jan. 31 meeting, but it would also support the Fed’s less hawkish stance announced earlier.
DXY has clear resistance at 103.10/20 and the case we have outlined above suggests that these levels may well be the top of the day’s trading range. If we are wrong and Waller has been sent to counter aggressive easing expectations (markets pricing in 18 bps of a first 25 bps cut in March and 158 bps of easing this year), then the DXY may break resistance and head into the of 104.00/25. day.