Written by Convera’s Market Insights team
The euro rebounds in a week of stormy agenda
Ruta Prieskienyte – FX Strategist
A plethora of economic data releases from the eurozone and broad-based USD selling on the back of upbeat risk sentiment has given the common currency a minor boost. EUR/USD broke through the $1.06 barrier on Monday, rising to a 1-week high, whilst GBP/EUR fell to a fresh 5-month low, closer towards €1.14.
The fall in German inflation advanced at the start of Q4, with headline inflation falling to 3.8% y/y in October (from 4.5% in September) thanks to a decline in energy and food prices. Despite said positive news, German economic growth is now stuck in a stagflationary hole. The latest real GDP print fell by 0.1% q/q in Q3, after a revised 0.1% increase in Q2, and growth in Q1 was revised down to 0%. Add to the mix a further decline in the EZ sentiment survey for October, and the message is clear: we are still waiting for the bottoming of the European economy. Positive progress on the inflation fight, yet rapidly deteriorating economic growth has cemented the view that the ECB tightening cycle is over. The markets have now started pricing in monetary policy easing bets for 2024, with about a 60% probability for the first rate cut to occur in April, which would open a door for further euro vulnerability. Some of the hawkish ECB policymakers labelled such bets as “entirely misplaced”, underlying that any such considerations would be assessed only after the bank’s next macroeconomic projections in December and March.
Last week was the fourth in a row where the European currency remained locked between the levels of $1.05 – $1.07 showing a picture of stabilization. The exchange rate seems to have fully digested these levels and the next big move will depend on the coming announcements as well as the developments in the geopolitical landscape. It is going to require some soft US data to turn this EUR/USD bearish trend around.
Treasury is stealing the Fed’s show
Boris Kovacevic – Global Macro Strategist
With markets expecting the Federal Reserve (Fed) to keep the policy rate unchanged at a 22-year high due to a cooling labour market and falling inflation, investors’ focus has already shifted from the monetary to the fiscal side of policy making. Just hours before the Fed’s Federal Open Market Committee (FOMC) concludes its two-day policy meeting with the final interest rate decision, the US treasury will release its new borrowing plan for the months ahead.
The quarterly refunding announcement has mostly been overlooked by market participants. However, the growing government deficit, decreased demand from the Fed and foreign governments and tumbling bond prices have put the refunding announcement on the map as a serious market mover. Treasury Secretary Janet Yellen rejected the idea that yields had been rising due to worries over the fiscal responsibility of the US government. Investors disagree as the demand side is not able to fully explain the recent rise of interest rates on the longer end of the yield curve. Yesterday came with some relief on that front. The Treasury reduced its estimate for federal borrowing for the coming quarter from $852 to 776$ billion. Still, the new projections would nonetheless set a new record for borrowing for Q4.
This matters for markets as the last refunding announcement back in August had coincided with the acceleration of the yield increase. At the macro front, the Fed will have four important data points at hand before making a decision on rates. Today will see the release of the Employment Cost Index and Consumer Confidence with the ADP employment report and ISM manufacturing PMI coming into focus tomorrow. The US dollar is starting the week on weaker footing as both bond yields and stocks pushed higher. The incoming economic data, the Fed and Treasury will decide the fate of the Greenback this week as the currency has moved in a tight sub 2% range during the last six weeks.
Pound set for third monthly drop
George Vessey – Lead FX Strategist
The yield on two-year British government bonds fell to its lowest since mid-June yesterday as investors further scaled back bets on Bank of England (BoE) rate rises. The probability of a hike this Thursday stands at less than 10%. The pound was mixed across the FX space but rose against the safe havens CHF and USD on improved risk sentiment. This morning, most GBP pairs are flashing red, bar GBP/JPY, which has jumped 0.6% after the Bank of Japan’s meeting.
The pound is back on the defensive against the dollar this morning and looks primed to record a third monthly decline in a row ahead of the Fed and BoE decisions this week. No hike is expected by the BoE this Thursday, but the spotlight is on the release of updated macroeconomic projections. The current expectations point towards the persistence of stubborn inflation, implying the BoE may have to continue holding rates at multi-year highs. However, earlier this month, Governor Andrew Bailey welcomed the encouraging decrease in core inflation and according to several leading indicators, we expect headline inflation to dip under 5% before year-end. Meanwhile, according to BoE data yesterday, in September, the number of mortgage approvals for new home purchase dropped to about a third lower than the same time last year, underscoring the property market’s deceleration due to the increasing cost of borrowing.
What’s interesting so far this quarter is the lack of volatility in FX markets. It’s been a very muted year of volatility in the currency space overall, especially compared to fixed income and even equities, but usually this time of year we see implied volatility pick up. Amidst growing geopolitical tensions, recession fears on the rise and the end of the tightening cycle in sight, we still expect FX volatility to spike over the next couple of months – as it tends to do.
Gold down 4% in a week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: October 30 – November 03
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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.
