The final trading week of April is scheduled to be a busy one when it comes to scheduled data releases, with earnings updates from corporate giants such as Microsoft, Amazon and Meta platforms likely to be a headline focus. What investors will want from the company updates is to gather further information from corporate America regarding how consumer demand has reacted to ongoing global economic challenges. It goes without saying that we are specifically referring to persistent inflationary pressures pushing prices higher and a drastic shift higher in interest rates worldwide as a result.
A pessimistic narrative coming out of Wall Street is likely to repeat concerns that the Federal Reserve has pushed the accelerator as far as it can with higher US interest rates. It does appear that the market is waiting for signals that potential interest rate cuts could be on the agenda, yet the most recent comments from Fed officials suggest that previous hopes that this could occur later in 2023 was premature. Negative headlines from corporate giants could be the impetus require for a shift lower in interest rate expectations sooner rather than later.
While the market might hope that inflationary pressures have peaked, price pressures are likely to remain persistently high. This creates a dilemma for any central banker to really push the conversation that interest rate cuts are required right now with real conviction. Nonetheless, we are starting to gather clues that such a drastic shift in higher interest rates over the last year is having a detrimental impact on the United States economy. The most recent example being the jump in Initial Jobless Claims from Thursday last week.
Still, we would need a consistent run of such headlines and likely a number of disappointing monthly employment reports from the United States to begin selling the idea that the Federal Reserve will soon start decreasing interest rates. It would not be a major surprise by any stretch if such potential conversation becomes a theme to watch for 2024, rather than something to expect this year.
For the time being earnings reports from corporate America are likely to guide financial market sentiment.
EURUSD waits for action
Investors will hope that the upcoming economic data releases from Europe this week will inspire the EURUSD into action after an uninspiring previous trading week.
The IFO Business Climate Report and Unemployment Change from Germany will take focus before flash GDP readings at the end of the week. Although it might appear that buying momentum in the EURUSD has taken a recent pause, the consensus that global foreign exchange has taken as much of a beating from a stronger USD as it can handle suggests that a stronger Eurodollar later this year is still on the cards.
GBPUSD appears overbought
Buying sentiment in GBPUSD does appear fatigued and there are valid reasons to expect a pullback in the Pound after it rallied from 1.20 at the start of the year to as high as 1.25 by April.
Hopes elsewhere that inflationary pressures have peaked do not represent the story for the United Kingdom economy with the UK still encountering double-digits inflation. The Bank of England has arguably not been hawkish enough with interest rate rises, and economic challenges from a fundamental point of view do suggest that if the Pound manages to advance from current levels, it will more likely be because of Dollar weakness than plaudits for the United Kingdom economy.
Gold not completely giving up on $2,000
Indecision over where Federal Reserve policymakers really sit on future U.S. interest rate expectations can be reflected in the inability of Gold to keep its head above water in regard to the psychologically important $2,000 handle.
Yet, the precious metal is still up by close to 10% year-to-date and investors are likely to take a simple approach towards investing over the longer-term. By this it is implied that the higher likelihood of the Fed turning dovish is going to increase the likelihood of Gold buyers returning to the market.
USDZAR remains above 18
If there was a currency in the FX space that would take whatever good news that it can get, the South African Rand would be up there in the conversation.
USDZAR continues to trade narrowly above 18 and unless there is a sudden shift towards a bullish sentiment for emerging markets, there is not necessarily a reason why an investor will want to take on the risk of jumping into a ZAR trade.
Aside from the scheduled trade balance economic release at the end of the week, the upcoming one for South Africa is a relatively quiet one in terms of economic releases. Therefore, we expect global financial market sentiment to lead the way for emerging markets.
One particular sensitive spot for investors in high-yielding emerging markets is the tone from Fed policymakers that talk of US interest rate cuts should be pushed into 2024.
Such a hypothetical event from a fundamental point of view provides stability to the USD, which is the opposite to what emerging market currencies as a whole want to hear after being pressured by relentless USD strength for months.