The Thai baht will be one of the top emerging market currencies to watch this week as the country’s central bank delivers its first decision of the year. The USD/THB exchange rate has been in an uptrend in the past few days as the US dollar index (DXY) has jumped.

The USD to THB pair will be in focus on Wednesday as the Thai central bank makes its interest rate decision. This is an important decision that comes two days after the country published a weak inflation report.

Data showed that Thai’s inflation continued plunging in January. The headline CPI dropped by minus 1.11% after falling by 0.83% in the previous month. This decline was steeper than the median estimate of -0.82%.

Further, core CPI, which excludes the volatile food and energy prices, rose by 0.52% in January after rising by 0.58% in December. Again, this was a weaker number than what analysts were expecting and is a sign that the economy is weakening.

In theory, falling prices are good for consumers but they could be a sign that the economy is not doing well. For example, when prices are falling, many people tend to hold back spending hoping that prices will fall further. This, in turn, leads to weak consumer spending.

In most cases, as we have seen with China, central banks tend to cut interest rates to stimulate spending and boost prices. However, most analysts believe that Thai’s central bank will leave rates unchanged at 2.50% for the third straight meeting. Before that, like other banks, the BoT had hiked rates from the pandemic low of 0.50%.

The decision will come a week after the country’s data showed that the economy was slowing as tourism arrivals and spending fell. The economy expanded by 2.4% in Q4 as private consumption and industrial production waned.

Therefore, there is a likelihood that the central bank will point to rate cuts in the first half of the year to boost spending.

USD/THB chart by TradingView

The daily chart shows that the USD to THB exchange rate has remained in a tight range in the past few days. It was trading at 35.25, a few points below the key resistance point at 35.73, its highest swing in June last year.

The pair has moved above the 50-day and 25-day Exponential Moving Averages (EMA), which is a positive sign. It has remained above the ascending trendline that connects its lowest swings since February last year. 

Therefore, the outlook for the USD/THB is bullish as the Fed and Bank of Thai diverges. In the US, the Fed has pledged to leave rates at the current level for a while.  If this happens, the next reference level to watch will be at 36.25. This view will be confirmed if the price moves above the key resistance at 35.87.

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