Divergence Persists Between US and Euro Area Economies

The economic tale of two continents persisted through the final quarter of 2023, with the United States outpacing the euro area yet again. According to recent data, the US economy expanded by 0.8% quarter-on-quarter, while economic activity stagnated in the euro area. This divergence brings the 2023 GDP growth rate to 2.5% in the US and a modest 0.5% in the euro area, underscoring the ongoing disparities in growth trajectories. One notable factor contributing to this growth discrepancy is the robust private consumption in the US, which has been a consistent driver of economic expansion. However, it's worth noting that despite the growth disparity, labor markets in both regions remain historically robust. In December, the unemployment rate in the euro area held steady at 6.4%, while in the US, nonfarm employment defied expectations, surging by an impressive 353,000 jobs, with an upward revision of 126,000 jobs for December. Furthermore, wage growth in the US saw an uptick in January, accompanied by a decline in the participation rate:Central banks on both sides of the Atlantic, namely the European Central Bank and the Federal Reserve, delivered a strong pushback against market expectations for significant rate cuts in the coming months. While offering no new policy signals, both institutions have hinted at a cautious approach, resulting in a notable shift in market sentiment. Currently, there's a 13% probability of a rate cut for both the Fed and the ECB in March, compared to considerably higher probabilities just a month ago.Inflation trends have also been closely watched, with slight upside surprises recorded in both the US and the euro area. Service inflation, particularly in the US, has proven resilient, contributing to a higher-than-expected CPI of 3.4% year-on-year in December for the US and a 2.8% year-on-year increase in the euro area's Harmonized Index of Consumer Prices (HICP) in January. Core inflation in the US reached 3.9%, maintaining robust momentum. Meanwhile, the currency markets saw GBP/USD facing downward pressure, losing nearly 0.8% on Monday before bouncing back on Tuesday. The US Dollar's strength, driven by surging Treasury bond yields and upbeat ISM Services PMI data, initially weighed on the pair. However, with improving risk sentiment, GBP/USD managed to regain some ground, trading slightly above 1.2550. The key short-term support level for the pair resides slightly below 1.25 (December low), where the 100-day SMA may also trigger some buying pressure:Looking ahead, investors are closely monitoring Wall Street's performance, as bullish momentum in US stock indexes could potentially dampen interest in the US Dollar, thereby aiding GBP/USD's recovery. Furthermore, the absence of high-impact data releases from the US on Tuesday leaves investors sensitive to shifts in risk perception.In the commodities market, gold prices struggled to gain traction, hovering near a one-week low around the $2,015 mark. Expectations of prolonged higher interest rates by the Federal Reserve limited the upside for the non-yielding precious metal. However, geopolitical uncertainties and concerns over slowing economic growth in China provided some support to gold prices, cushioning the downside. Market participants are awaiting speeches by influential Federal Open Market Committee members, along with broader risk sentiment, to gauge further movement in XAU/USD.