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Forex Market Analysis: USD Strengthens Amid US Inflation Data Surge 12 Jan 2024

January 12, 2024

FX Daily Analysis: 12 Jan 2024

CURRENCIES:

  • The US Dollar gains strength in response to higher-than-expected US inflation data and a decrease in unemployment claims.
  • Despite inflation exceeding the target and a robust labor market, the Federal Reserve may hesitate to cut interest rates prematurely.
  • The technical analysis in this article focuses on EUR/USD and GBP/USD, examining critical price levels post the US CPI report.
  • The DXY index, measuring the US Dollar, rises by 0.3% following the release of the December inflation survey and weekly jobless claims data.
  • Headline CPI surprises on the upside, registering 3.4% year-on-year, surpassing the expected 3.2%, while the core gauge comes in at 3.9%.
  • Jobless benefits applications hit a three-month low, indicating a resilient labor market and ongoing hiring despite the late business cycle stage.
  • With consumer prices above the 2.0% target and a strong labor market, the Fed is unlikely to make significant interest rate cuts, contrary to market expectations.
  • Monitoring Fedspeak in the upcoming days and weeks will provide insights into the monetary policy outlook, with a potential shift towards a more hawkish stance favoring yields and the US Dollar.

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STOCK MARKET:

  • Banks stocks, coming off their strongest quarter since 2021, are poised for a significant earnings event where top executives will provide insights into the US economy.
  • JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., and Wells Fargo & Co. are set to kick off the earnings reporting cycle after US bank stocks gained 23% in the last quarter, outperforming the broader market.
  • Bank shares faced pressure in 2023 but surged in late October amid confidence that the Federal Reserve would conclude its rate-hike campaign without causing a recession.
  • The focus now shifts to the timing of policy easing, with investors closely examining its implications for various aspects of the banking business, including loan portfolios and deposit rates.
  • Analyst Richard Ramsden from Goldman Sachs Group Inc. notes that while banks are not as cheap as before, their valuations are not perceived as stretched.
  • Positive outcomes regarding net interest income, loan growth, capital markets, and deposit pricing are expected to contribute to greater earnings and potential outperformance by some banks.
  • The KBW Bank Index fell about 1% on Thursday, underperforming the broader market.
  • Morgan Stanley and Goldman Sachs’ earnings on Tuesday will be closely watched, along with PNC Financial Services Group’s results, which will serve as a bellwether for regional lenders.
  • Big banks are anticipated to report subdued fourth-quarter results due to higher funding costs, with net interest income expected to decline, and elevated expenses and weak trading revenue likely weighing on earnings.
  • Companies are also expected to disclose payments to the Federal Deposit Insurance Corp. related to regional bank failures from the previous year.
  • The rally in bank shares last quarter was driven by optimism about reduced recession risks and expectations of Fed rate cuts in 2024, alleviating concerns about net interest margins.
  • Despite positive momentum, caution is advised, with concerns about the inflation rate remaining above the Fed’s target and potential wild swings in sentiment.
  • Hedge funds have been selling the financial sector in the past four weeks, but financial companies are the only sector where the majority of analyst earnings revisions were upward over the past month.
  • DWS Group’s David Bianco maintains an overweight position on big banks, including JPMorgan, Bank of America, Citigroup, and Wells Fargo, citing their robust profitability and stable credit.

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