Written by Convera’s Market Insights team
Falling oil price reinforces bets on rate cuts
Boris Kovacevic – Global Macro Strategist
The first week of the last month of the year is shaping up to confirm the macro and market trends seen in November. Investors have continued pricing in more monetary policy easing for 2024 for the major central banks as disappointing economic data has increased recession risks in the United States. Signs of a cooling labor market have underpinned the sharp fall in government bond yields across both sides of the Atlantic. However, the weakness in Europe has helped the Greenback establish a short-term bottom against the euro, as the fall in EUR/USD and global oil prices rippled through to other majors like the CAD, AUD, NOK, and GBP. The US Dollar Index is on track for its best week since July, being up around 0.9%. The closely watched non-farm payrolls report on Friday will decide the fate of the dollar going into the weekend and next week.
Global oil markets are defying worries over the war in the Middle East and the OPEC+ production cuts as prices continue to come down due to macro developments. Brent crude has fallen 20% from its cycle high in June ($96.50) and is now on track to fall for seven consecutive weeks ($74.70). A report from the US Bureau of Labor Statistics on Tuesday showed the number of open positions decreasing by more than 600 thousand to 8.783 million in October, falling to its lowest level since March 2021. Job openings have now decreased in eight of the ten months this year in a sign that the tightness of the labor market is easing. This narrative got reinforced by yesterday’s ADP release showing private employment (103k vs. 130k expected) rising less than expected in November. Companies scaled back hiring with the manufacturing sector reducing headcount to the lowest level since early 2022 and leisure and hospitality shedding jobs for the first time since 2021.
The last two weeks have been a rare display of events and market developments in Europe driving price action in the United States. We have been vocal about our expectation of inflation falling more sharply in the Eurozone and therefore anticipating earlier rate cuts from the ECB vs. the consensus. Markets have moved in our favor, which has limited the transition from lower US yields to a weaker US dollar. We see EUR/USD trading between $1.05 and $1.10 in the short-term as this dovish repricing in Europe reaches its limit.
EUR under strong selling pressure
Ruta Prieskienyte – FX Strategist
Euro selloff intensifies with EUR/USD down for the sixth consecutive day as markets continue to digest more dovish ECB signals from yet another policymaker. Hopes for an early rate cut campaign propelled European stocks higher, with the DAX closing at a new record level, and German 10-year government bond yield fell to a 7-month low of 2.2%.
On the macro front, October retail sales in the Euro Area increased by 0.1% m/m, breaking a four-month streak of declines, but remained broadly unchanged since August. The figure was pulled up by strong performances from Germany and the Netherlands, while France and Italy saw significant declines. Overall, consumer demand remained subdued due to persistent high inflation and elevated borrowing costs. On the production front, factory orders in Germany surprised the markets to the downside, declining 3.7% m/m in October in what was a clear signal that the industrial sector remains in a fragile state. Construction PMIs revealed that German construction sector remained in a deep recession as output fell to the lowest level in over three and a half years.
Anything but positive coincident indicators create a challenge for European Central Bank (ECB) going into next week’s policy meeting when it comes to keeping their options open without sounding too detached from reality. In recent weeks, remarks from ECB officials have been mixed, but with a clear dovish tilt. As Nagel pressed on that rate hikes remain on the table as a viable option, both Schnabel and now Kazāks acknowledged that cuts will be discussed over the course of 2024. Markets were more inclined to believe the latter and have priced in over 150bps cuts for next year – an additional two rate cuts compared with pricing from last week. As a result, EUR/USD breached past the 100-day SMA and is now testing fresh 3-week lows around $1.0760.
Pound down, UK yields at 7-month lows
Boris Kovacevic – Global Macro Strategist
The British pound ($1.2550) continued to move away from its 3-month high reached at the end of last week ($1.2750) and is now down around 1.45% since then. GBP/EUR has remained flat for four consecutive days, suggesting that the cables price movement is largely driven by the dollar dynamic. Falling oil prices and the global equity rally stagnating have taken the wind out of the pounds sails.
However, the recent pullback is not entirely due to the Greenback. Yields on British government bonds in the middle and the long end of the curve (10, 5-years) have fallen to their lowest level since May, suggesting that investors continue to expect falling inflation and weaker economic growth ahead. Interestingly enough, the Bank of England’s Financial Stability report indicated that households finances remain stretched due to the cost of living crisis as mortgage and credit card delinquencies have risen in recent times. The construction sector remains deep in contractionary territory with the S&P Global/CIPS PMI edging lower from 46.5 to 45.5 in November. This was the second-lowest reading since May 2020 and exemplifies the struggles of the property sector.
Investors see the Bank of England cutting interest rates less aggressively than the ECB and Fed next year. Core inflation remained elevated at 5.7% in October, more than double the BoE’s inflation target. However, we do expect a continued easing in price pressures, which could see the British central bank follow suit with its peers in cutting interest rates in the first half of 2024. This will be dependent on the incoming data, one of them being GDP and inflation numbers coming up next week and the week after. In the meantime, investors will follow developments in the Eurozone and US closely.
CAD/EUR up close to 2% in a week
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.
