Written by Convera’s Market Insights team
DXY stable after worst two-day drop since July
Boris Kovacevic – Global Macro Strategist
The last big week of the year is coming to an end with the G3 central banks having decided not to raise interest rates over the past two days. However, not every rate decision is created equal as the communication between the three institutions is starting to divergence. While the Federal Reserve indicated three rate cuts in 2024 and emphasized the cooling of the labor market and the progress on inflation, the ECB and BoE were hesitant to join their US counterpart in pivoting towards signaling easier monetary policy ahead.
Bond investors did not buy the hawkish message and are still pricing in 150 basis points of cuts from both the ECB and Fed. However, the pushback in the face of a faltering Fed did drag the dollar down for a third consecutive day to the lowest level since August. The macro data in the US was therefore overshadowed by the European rate decisions. The Atlanta Fed revised up its US GDP Nowcast for Q4 from 1.2% to 2.2% following a stronger than expected retail sales print. Sales increased by 0.3% in the month of November, beating the estimate of a 0.1% decline. Markets currently price in six rate cuts from the Fed for 2024, starting in March, which explains why the dollar recorded its worst two-day drop since July. DXY is now trading around the 102 mark and 5% below its October peak.
While the Fed has opened up the possibility of earlier than expected rate cuts, the incoming data will be the deciding factor in that matter. Until the next meeting that is followed by the release of the summary of economic projections, we will get three additional labor market reports, and more than a handful of inflation prints. These macro releases have the potential to sway market pricing in one direction or the other.
BoE pushback helps the pound for now
Boris Kovacevic – Global Macro Strategist
The only central bank meeting that followed expectations perfectly was the one from the Bank of England, where policy makers decided to leave policy rates unchanged and to push back against rate cutting speculations for 2024. The Monetary Policy Committee voted 6:3 to keep rates at 15-year highs of 5.25% with Governor Andrew Bailey emphasizing the need to continue the fight against inflation.
Given still high wage and core inflation rates, the Bank of England has been able to look over the recent weakness in economic data. Especially the last two weeks have confirmed a slowing economy with the UK contracting in October and seeing claimant numbers rise. However, policy makers wanted to send a signal that they are in a different camp than the US central bank with three members of the MPC voting to hike interest rates by 25 basis points.
And while markets are continuing to price in significant easing from the BoE due to the Fed opening up the flood gates to excessive rate cuts pricing on Wednesday, the pushback has been enough for the pound to benefit from it in the near term. GBP/USD rose for a fourth consecutive day (1.85%), reaching a four-month high at $1.2790. Cable has appreciated around 6% from its October low and is now just 2.8% away from its yearly top reached in July. It is trading in the upper half of its 2023 trading range, that is defined by its low at $1.18 and high point at $1.31.
Euro rallies as ECB sticks to its guns
Ruta Prieskienyte – FX Strategist
The European Central Bank (ECB) kept its deposit rate at a record high of 4% for the second consecutive meeting as widely anticipated. The euro rallied, adding further gains from an already favourable session on the back of a dovish FOMC meeting. EUR/USD climbed to a 2-week high above $1.10, before retreating towards $1.098 in the early Asia trading hours. European stocks trimmed gains but remained close to multi-year highs. Meanwhile, European bond yields plunged with the German 10-year Bund yield approaching 10-month lows at just above 2.1%.
The Governing council also announced its intention to reduce the PEPP portfolio by an average €7.5 billion per month in H2 2024 with the aim for the pandemic legacy program to be fully discontinued by the end of 2024. This will put all policy tools into a tightening mode. Policymakers have also pledged to maintain rates at sufficiently restrictive levels for as long as necessary, confirming that no rate cut discussions took place and reiterating that future decisions will continued to be data dependent. The newly updated central bank projections see inflation falling faster when compared to the September projections. Headline inflation forecasted to average 5.4% in 2023, 2.7% in 2024 and 2.1% in 2025. Real GDP forecasts have also been downgraded to 0.6% in 2023, 1.5% in 2024 and 1.5% in 2025.
Investors are sticking to rate cut bets despite ECB’s pushback that the market is pricing in too fast rate cuts. Some pullback was seen in Q1 rate cut speculations, with March rate cut no longer fully priced in. Broadly, policy easing expectations remain unchanged with close to 140bps cuts priced in over the course of 2024. In terms of FX implications, EUR/USD has more room to appreciate further in the Friday session as Asian markets open and investors continue to digest the news. However, we expect price pullback in due course as hourly RSI points to overbought territory and daily indicator is also edging closer to such territory.
FX benefiting from falling dollar
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 04 December
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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.
