Written by Convera’s Market Insights team
Markets bet on five Fed cuts for 2024
Boris Kovacevic – Global Macro Strategist
November is shaping up to be the best month for US Treasuries since 1980 with the Bloomberg aggregate government bond index rising by 4.4% this month. The fall in yields has sparked an everything rally from high yield credit, to EM equities and FX. With the economic data in the US weakening enough for the Federal Reserve to consider ending its tightening cycle, but not enough to cause panic over a near term recession, the soft landing narrative has pushed up the MSCI World Index 8.9% in November, putting it on track for its best year in three. This thesis was reinforced this week with multiple Fed officials stating that they would be comfortable leaving rates at current levels for now. Markets are currently expecting the Fed to start its easing cycle in May and cut interest rates five times next year.
We think that markets are both positioned for a soft landing and for the Fed to cut rates. So, any economic data that comes in weaker than expected, is initially good for risk assets and bad for the dollar. However, if US macro data starts going from bad to recessionary, then the soft landing narrative will fall. At the other end of the spectrum, if US data outperforms expectations by a large margin, this would put the bets of rate cuts into question. And we think that both scenarios would lead to higher market volatility. Especially given the currently suppressed levels and complacency of investors.
The US Dollar Index is still on track for its worst month this year, being down 3.7%. However, this week’s everyone rally did take a breather yesterday, after investors took some profit following the better-than-expected US GDP print. The US economy grew slightly more in Q3 than initially expected (5.2% vs. 5%), showing how strong the momentum during the last quarter really was. On the other side, the Fed’s Beige Book (Summary of Commentary on Current Economic Conditions) showed some economic weakness amidst a consumer pullback. This comes just before the release of US PCE report, which could likely show headline inflation falling from 3.4% to 3%. On Friday, the ISM manufacturing index will be released and this week’s Fed speak will be rounded out by Fed Chair Jerome Powell.
Euro below $1.10 as inflation cools
George Vessey – Lead FX Strategist
We have been repeating for some time that inflation in the Eurozone will fall faster than the market and the European Central Bank (ECB) expects. Indeed, yesterday we saw German inflation (3.2%) ease more than forecast (3.5%) in November on falling energy and travel costs. As expected, EUR/USD recoiled from 3-month highs above $1.10 as a result and has shed about 50 pips since.
A continuation in the disinflationary trend, seen in data across Germany and in Spain yesterday, pushes back against the ECB’s higher for longer rhetoric. Consequently, the German 2-year yield slipped to a fresh multi-month low following a break below 2.9%, with risks now geared towards a test of 2.5%. That shift lower could be sparked by today’s Eurozone inflation data falling below the consensus forecast of 2.7% y/y, which would mark its weakest since July 2021. But the measure the ECB is watching closely is the core gauge, which was above 4% last month, though this continues to cool at quick pace too. Considering the latest developments, markets are pricing in 100 basis points of ECB easing for 2024 with the first rate cut near enough fully priced in for April. However, the disinflationary trend opens the door for a March cut and with 10 basis points priced in, there is room for a dovish repricing should overall inflation figures come in lower today.
For now, this has dragged EUR/USD back away from the $1.10 handle and as we mentioned yesterday, holding above this level may prove difficult to sustain with technical indicators standing near overbought readings. The global economic backdrop remains non-supportive for the euro too. Yesterday’s OECD projections showed the world economy slowing down to just 2.7% next year as high interest rates take their toll on the real economy. At the same time, China continues to underperform expectations. The Chinese manufacturing PMI edged down to 49.4 in November, missing forecasts and pointing to the lowest manufacturing activity since June.
Pound to dollar overbought
George Vessey – Lead FX Strategist
The British pound is set to record its biggest monthly rise against the US dollar in a year. Corrective risk is increasing though, and a pullback ahead of the weekend is likely given yesterday’s indecisive price action and overbought conditions. The 100- and 200-day moving average are big support levels just under $1.25 though.
It’s mostly a dollar and global sentiment story driving the pound higher, as evidenced by its strong positive correlation with EUR/USD and the break above $1.10 we saw earlier this week. That said, GBP/EUR has also edged up to more than 1-month highs this morning and has broken north of its 100-day moving average. The last time we saw such a move back in April, GBP/EUR went on to climb about another 3% higher in less than two months. In the macro space, there hasn’t been much in the way of top-tier domestic data driving the pound this week, although we did see yesterday that UK consumer credit grew by 8.1% as British consumers increased the pace of their borrowing by the most in five years in the 12 months to October, underscoring the impact of the higher cost of living on households.
The influx of key European and US inflation data will be the main market movers today. Signs of inflation cooling further could spur more risk taking amid bets of policy easing in 2024. This could be enough to allow the pound to at least consolidate at these higher levels.
CAD/NZD down over 1% in a week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 27-December 1
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
