US Dollar Falls, Eurozone Economy Slips to Recession

The US dollar declined against its major trading partners early Wednesday, except for a gain versus the yen, ahead of the release of wholesale inventory and sales data for November and weekly oil stocks data.

A quick summary of foreign exchange activity heading into Wednesday showed that the USDEUR rose to 1.0946 from 1.0932 at the Tuesday US close and 1.0931 at the same time Tuesday morning.

There are no EU data on Wednesday’s schedule, but European Central Bank member Luis de Guindos said overnight that the pace of the slowing in inflation is likely to pause early in the year and that prospects for mild growth are uncertain in 2024 after a weak Q4, Reuters reported.

The next ECB meeting is set for Jan. 25. GBPUSD rose to 1.2727 from 1.2710 at the Tuesday US close and 1.2714 at the same time Tuesday morning.

There are no UK data on Wednesday’s schedule, putting the focus on an appearance by Bank of England Governor Andrew Bailey. The next BoE meeting is set for Feb. 1.

USDJPY rose to 145.0213 from 144.4881 at the Tuesday US close and 144.0855 at the same time Tuesday morning. Japanese wage income rose only slightly in November, data released overnight showed. The next Bank of Japan meeting is scheduled for Jan. 22-23.

USDCAD fell to 1.3371 from 1.3390 at the Tuesday US close and 1.3374 at the same time Tuesday morning. Canadian consumer sentiment data for January are scheduled for release at 10:00 am ET. The next Bank of Canada meeting is set for Jan. 24.

ING expects the euro to rebound against sterling from the second quarter as eurozone money markets are “considerably overestimating” the likely size of European Central Bank interest-rate cuts, says currency analyst Francesco Pesole in a note.

Meanwhile, markets price in U.K. monetary easing in 2024 of around 15 basis points less than in the Eurozone and U.S., he says.

“A deterioration in economic conditions in the U.K. will ultimately warrant substantial BOE rate cuts,” Pesole says, adding that ING estimates a 100 basis-point reduction. EUR/GBP could remain weaker in the near term, however, Pesole says.

The Eurozone could be in the midst of a recession, according to the European Central Bank’s vice president. Economic activity slowed in the third quarter of 2023, coming in at a contraction of 0.1%, and indicators point to an economic contraction in December too, confirming the possibility of a technical recession in 2H 2023, Luis de Guindos says in a speech in Madrid.

“Incoming data indicate that the future remains uncertain, and the prospects tilted to the downside,” he adds. While the easing of inflation has been “good news,” the slowdown in growth is more disappointing, de Guindos says.

The weakness appears to be broad-based, with construction and manufacturing particularly hit, while services will also soften in the coming months from weaker activity in the rest of the economy, he says. Naira Devaluation Deepens Economic Crisis in Nigeria