Written by Convera’s Market Insights team
US stocks up 10% since October low
Boris Kovacevic – Global Macro Strategist
Investors are still digesting the US CPI print from Tuesday and its implications on broader markets and the Fed’s monetary policy, which made the day one of the most volatile so far this year. However, as is the case after most event-driven spikes in volatility, the following day is characterized by some unwinding of the previous day. Both US Treasury yields, and the dollar bounced back after the CPI induced fall on Tuesday.
While some of yesterday’s minor retracement has been driven by an overstretched positioning, the better-than-expected US retail sales print did give the Greenback a bit of support. Still, optimism surrounding the number had been muted given the parallel release of the US producer price index confirming the disinflation shown by the CPI a day before. Both inflation and consumer spending are cooling. The US consumer spent less in retail stores in October compared to the previous month. Retail sales fell by 0.1%, after an increase of 0.9% in September. While the decline beat the expectations of a 0.3% fall, it does show that retail spending is losing steam. At the same time, producer prices fell by 0.5% on the month, the most since April 2020.
Both releases come after the CPI report on Tuesday showed consumer price growth falling to 3.2%. With markets putting the probability of another rate hike in the next six months to close to zero, stocks embraced the disinflationary numbers and continued their ascent. The S&P 500 is now up 10% from its October lows and is now only 5% away from its all-time highs.
Sterling slides sharply from 2-month high
George Vessey – Lead FX Strategist
Unsurprisingly, GBP/USD retreated back towards $1.24 yesterday having clocked its best day of the year (+1.6%) the day prior. We acknowledged heavily overbought trading conditions on the intraday charts, but the pullback has resulted in a close back below the 200-day moving average, which may increase the downside bias even more so in the short-term.
Data showing UK inflation fell more than expected moved the expected timing for the Bank of England’s (BoE) first rate cut from August to June next year. This triggered the initial profit taking of the pound at 2-month highs versus the dollar, dragging the currency pair south of $1.25 and closer to $1.24 after US retail sales fell less than expected. The majority of the volatility across financial markets is being driven by US centric events these days and so the recent dovish repricing of Fed policy expectations had sent yields lower and stocks higher. The pound suffered across the board though, disconnecting from its usual positive correlation with risk assets, which suggests the softer UK wage growth and inflation figures this week have also influenced GBP price action. That said, with wage growth still high and inflation well above target, we don’t expect the BoE to cut interest rates before the Fed next year, which should help support GBP/USD in the longer term.
Against the euro, we are wary of economic data seasonally surprising higher in the Eurozone this time of year, which coincides with our call that soft economic data across the bloc may be bottoming. This brings with it downside risk for GBP/EUR, but a modest move at best given ECB rate cutting expectations.
Euro up, promise of bottoming
Ruta Prieskienyte – FX Strategist
Following the biggest daily euro rally in a year as a response to softer than expected US CPI print, Wednesday proved to be rather quiet. EUR/USD retracted 0.3% on the day but remained firmly above the 100-day and 200-day moving averages. European bond markets were also muted, while stocks advanced for the third consecutive day as slowing inflation across major economies fuelled optimism about the potential conclusion to central banks’ tightening policies.
The European Union’s executive commission cut its growth expectations for Eurozone in its Autumn forecasts released yesterday. The GDP forecasts were revised down to 0.6% for 2023, from 0.8%, and to 1.2% for 2024, from 1.3%, saying the economy “has lost momentum” as inflation discourages consumers and higher interest rates deter borrowing for purchases and investment. Putting this into perspective, the economy has barely grown this year, recording 0% increase in Q1, 0.2% growth in Q2, and a minor contraction in Q3. For consumers, inflation is forecast to drop further to 3.2% in 2024 and to 2.2% in 2025 as energy is expected to add mildly to headline inflation in 2024. The forecasts come in more dovish than the ECB’s as policymaker Villeroy reiterated yesterday that the central bank remains confident in returning inflation to its 2% target by 2025. Elsewhere, China reported better-than-expected retail sales and industrial data for October, while the real estate drag worsened. The net positive news should inject fresh optimism into the markets and support risk prone assets.
Looking ahead, the calendar on the Eurozone data is light once again, but the day will be filled with four ECB speakers. Investors will be keeping an eye on ECB President Lagarde in particular for any clues on the interest rate trajectory. However, we do not expect clearer forward guidance to come, simply a reiteration of the bank’s data dependence and higher for longer rhetoric.
EUR & GBP clock fresh multi-year highs versus JPY
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 13-17
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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.
