USD Nothing New Going Into the New Year

The opening of the Asian session set a positive tone, propelled by a significant downward revision to the United States' Q3 GDP figures, indicating a palpable deceleration in the nation's economic activity. This revision, in turn, fuelled heightened investor expectations of an assertive rate cut by the Federal Open Market Committee (FOMC) in the year 2024. The initial optimism, however, faced a swift challenge as China's policymakers enacted stringent measures, including the halting of rare-earth minerals export and introducing further regulations in the online gaming sector. These measures cast a shadow over the positive sentiment, leading to a mixed trading scenario in Asian markets, alongside a decline in S&P 500 futures.

Within the realm of the US dollar (USD), the currency continues to trail behind, grappling with challenges as December unfolds, marked by its typically negative seasonality. The recent downward adjustment in the US GDP figures for Q3, coupled with softer metrics such as Personal Consumption Expenditures (PCE) and GDP price deflators, has not favoured the USD. All eyes are now fixed on the imminent release of US PCE data for November, with expectations that any further cooling in inflationary pressures could reverberate through the currency markets. The USD's performance remains intricately tied to prevailing interest rates as market participants keenly observe whether the persistent decline over the past few months will find a stabilizing floor as we transition into the year 2024.

In the context of the British pound (GBP), the currency remains under pressure following an unexpected downturn in UK inflation data. The upcoming release of the final Q3 GDP figures and November retail sales data is anticipated to furnish additional evidence of the UK economy grappling with various challenges. While adverse weather conditions and seasonal discounts may contribute to a modest month-on-month uptick in retail sales, the prevailing sentiment suggests a subdued consumer mood, exacerbated by the ongoing cost-of-living crisis. A negative surprise in retail sales could potentially prompt heightened expectations of additional monetary easing from the Bank of England (BoE) in the coming year.

Shifting focus to Japan, inflation data for November aligns closely with consensus estimates, revealing a retreat in both headline and core inflation measures. Despite inflation still running above the Bank of Japan's (BoJ) 2% target, the central bank maintains its ultra-dovish stance, projecting a continued decline in inflation with a return below the target in the fiscal year 2024. The BoJ's dovish posture has had ripple effects on the estimated short-term fair values of USD/JPY and EUR/JPY. Meanwhile, on the global stage, the Canadian dollar (CAD) appears poised to outperform the USD in 2023, experiencing a recent correction driven by various factors, including the dynamics of the USD itself and the reversal in developed market (DM) rates. The Bank of Canada (BoC) remains cautiously optimistic, signalling that interest rates may already be sufficiently high. Upcoming GDP data, set to be released imminently, could play a pivotal role in shaping the trajectory of USD/CAD into the year 2024.

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