The dollar’s strong start to 2024 has partly reversed today as the surprisingly weak US ISM non-manufacturing survey has more than offset another robust US non-farm payrolls report. Even so, the greenback remains up on the week as interest rate expectations rebounded and risk sentiment soured over the first few trading days of the year. Our sense is that this reflects the “everything rally” that dominated the last two months of 2023 reaching exhaustion – the S&P 500, for example, had recorded nine consecutive weekly increases, for the first time since 1989 – more than it does the newsflow this week, which has been mixed. As such, while a further unwind of the optimism in evidence over the past couple of months may well be in store, the bigger picture is unchanged. Currency markets remain caught in the crosswinds between continued hopes that the Fed will deliver a rapid easing of monetary policy this year and the twin fears of either sharp slowdown in economic activity or a reignition of inflationary pressures leading to a return of “higher for longer”.
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