When does good news become good for the markets? The answer to this question is extremely important for understanding the future dynamics of various assets. Including . The initial reaction of the US stock indices and the major currency pair to the impressive jump of 3% m/m in January was to fall. However, the market subsequently recovered. He took the positive from the economy as a reason for the rally. Why?
If we add to the best dynamics in two years, the first increase in the last three months, a breathtaking rise in 517 thousand and an acceleration of 0.5% m / m, it becomes clear that American consumers are in excellent shape, and the US economy will easily avoid recession in beginning of the year. A leading indicator from the Atlanta Fed raised expectations for first-quarter growth from 2.2% to 2.4%.
US Retail Sales Dynamics
Source: Bloomberg
Such a sea of positives from the US macro statistics suggests that the economy easily withstood the most aggressive monetary restriction cycle in decades, and the Fed’s efforts to cool it are not producing results. This means that the central bank should surprise with higher rates than the markets expect.
If in early February, CME derivatives predicted a peak in borrowing costs at 4.9%, followed by a decrease of 50 bp. by the end of 2023, they currently see a ceiling of 5.25% and at best one cut in the federal funds rate by 25 bp. this year. At the same time, three acts of monetary restriction, in March, May and June, are regarded as fifty-fifty.
Estimated dynamics of the Fed rate
Source: Wall Street Journal
Against the backdrop of a strong economy and unwilling to slow down the previous rates of inflation, it is obvious that both indicators have room to change. The expected peak will grow, and the idea of a “pigeon” reversal in 2023 will sink into the abyss. This is very good news for the US dollar. All the more surprising is the inability of EUR/USD to consolidate below 1.07.
The culprit is the rally in US stock indices, for which good news has become good again. ING believes that the rise in retail sales is a temporary phenomenon associated with abnormally warm weather. In my opinion, the current situation needs to be looked at more broadly.
In 2022, the US dollar strengthened, primarily due to the fact that the US economy looked clearly better than the rest. Better than China with its COVID-19. Better than the eurozone with its proximity to the war in Ukraine and the energy crisis. In 2023, everything has changed. Is it possible to compare the American +2.4% with more than +5% in the Middle Kingdom, which the IMF expects to see? The states act as an additional driver of global economic growth, and if everything is in order, then the demand for risk will remain high.
In this context, the EUR/USD correction potential seems to be limited by the 1.05-1.06 area. In my opinion, the main currency pair will rise in 3 months to 1.1, and by the end of the year it will reach 1.15. Traders should move from short-term selling to medium-term buying.
