Under pressure from multiple economic data far better than expected, and with Fed officials continuously rain on markets’ parade on expectations of early rate cuts, the market's expectations for the Fed to cut interest rates earlier this year have been completely dashed. There are even voices suggesting that the Fed may raise interest rates again, pushing the US dollar to rebound to near-term highs in February, briefly breaking through 104.50. In the post-meeting statement and meeting minutes of the January FOMC meeting, it can be seen that although the Fed has clearly ended its rate-hiking process, officials are more concerned that too rapid rate cuts will affect the achievements of the previous stage in combating inflation, reflecting that previous market expectations were indeed too high. Moreover, the rebound in inflation data once or twice is not enough to change the Fed's policy direction, but it will indeed significantly delay the rate-cutting process for the year. In addition, the latest non-farm payroll data shows signs of accelerating wage growth, coupled with recent mild rebounds in energy and food prices, which could lead to a spiral increase in US inflation once again. The Fed's management of market expectations is beginning to take effect, with the latest market forecasts suggesting that rate cuts may not be considered until after May at the earliest, and there will be no more than 3 rate cuts throughout the year.

On the other hand, the economic situation in the Eurozone is bleak, with the largest economy, Germany, experiencing consecutive GDP contractions for two quarters, falling into recession, and the second-largest economy, France, also on the verge of recession. Fortunately, inflation is still declining, providing room for the ECB to adjust its policies. Although ECB President has stated earlier that he will not cut interest rates prematurely, the weak economy has already led to internal divisions within the ECB, and it is not ruled out that eurozone member countries may pressure the ECB to cut interest rates early to support economic recovery. After falling below 1.10 in January, the euro has failed to recover despite multiple rebounds, indicating weakness, and it is not ruled out that it may weaken again in the future, testing the 1.05 level. As for the US dollar index, it is expected to still have room to rise, and after consolidation, it is expected to test 105 again.

Japan's GDP unexpectedly contracted by 0.4% in the fourth quarter of last year, marking consecutive contractions for two quarters and entering a technical recession, slightly cooling expectations for a rate hike by the Bank of Japan. However, data for January showed a rebound in Japan's services and manufacturing sectors, improving economic growth momentum for the year. Japan's economy is at a turning point, with the labor market likely to remain tight and affect wage negotiations in March. The Bank of Japan seems to have enough patience to wait for a benign cycle of wages and prices to appear, as evidenced by its recent frequent verbal expressions of tightening intentions without substantive action. After falling below 150 again, there is a chance that the yen exchange rate may hit new lows again, but later this year, it may still see highs.

Patrick Law

Chief Operating Officer of Hantec Group