Written by Convera’s Market Insights team
Repricing election odds lead dollar lower
Boris Kovacevic – Global Macro Strategist
The first presidential debate between former President Donald Trump and current Vize President Kamala Harris in Philadelphia is over. A lot of open questions regarding policy have been left unanswered as both candidates agreed, in principle, to another debate sometimes before November 5th. It might be ironic that Taylor Swift’s endorsement of Kamala Harris, who is seen as having come slightly on top in the debate, might have had a bigger impact on voting intentions that the wrangle with Trump. Markets tend to agree with that view. Betting markets now see a slight bias toward Harris (56-52%) vs. Trump (48-44%) winning the election and the dollar (+ US equities) fell in the Asian trading session following the debate. Trump is currently seen as more positive for both assets than Harris, given his stance on lowering taxes and introducing additional tariffs.
Government bond yields across the curve continued to trend lower this week. The 2-year Treasury yield fell to 3.57%, closing in on the low from September 2022. Fed futures are favoring a 25 basis point cut next week but the chance of a jumbo cut rose slightly from 30% to 35% since yesterday. Today’s highly anticipated CPI report could slightly alter these probabilities. Inflation is expected to have fallen from 2.9% to 2.6% in August as the core rate got stuck at 3.2%. With no Fed speak coming up due to the blackout period, the data will be up to investor’s interpretation.
Bank of Japan officials continue to uphold their hawkish bias, fuelling the narrative of a potential rate hike coming before year end. This expected policy normalization coupled with US yields falling to 17-month lows have dragged USD/JPY to a new 2024 low point at 140.50¥. The Japanese yen is currently tearing through FX markets, having appreciated against 98% of the world’s currencies since the beginning of the second half of 2024. Going forward, risks are more neutrally balanced for the yen. Asset managers turned net-bullish on the currency for the first time this year and with 270 basis points of Fed cuts already priced into futures for the next 24 months, the room for dovish repricing is limited. A slow appreciation to below the 140¥ mark remains our baseline.
Pound falls as growth stalls
Ruta Prieskienyte – Lead FX Strategist
The UK economy stagnated in July, matching the previous month’s performance and missing market expectations across all key sectors. Services output edged up by 0.1%, after a 0.1% decline in June, but a 0.8% drop in production output, driven by weakness in manufacturing, resulted in flat overall growth for the month. Construction output also contracted by 0.4%, following a 0.5% rise in June. Over the three months to July, UK GDP increased by 0.5%, with widespread growth in the services sector, though it still missed forecasts and is tracking the slowest quarterly pace this year.
When UK markets open, we expect rates to trend lower as traders adjust to the disappointing data, with some bets on rate cuts potentially added into the OIS curve. However, we do not believe this significantly alters the Bank of England’s near-term outlook. We anticipate the BoE will remain the most hawkish among G3 central banks, refraining from cutting policy rates in next week’s decision, where the probability of a rate cut has stayed around 20% over the past month.
Despite the weaker data, the pound was initially unfazed, buoyed by a midnight boost from US election polls, which showed Kamala Harris rising to 56% in prediction markets, but eventually surrendered the early gains. We expect a muted reaction from the pound ahead of the US CPI release later today. However, once that hurdle is cleared, we foresee some softening of the pound due to the disappointing growth outlook.
Euro boosted by US presidential debate
Ruta Prieskienyte – Lead FX Strategist
The euro received an early morning boost on the back of the US presidential debate having previously fallen to a 3-week low of $1.103 the session prior, as investors grew increasingly cautious ahead of key risk events this week. European equities pulled back on Tuesday, reducing the week-to-date gains by three-quarters, while bonds remained in demand. The two-year Bund yield fell to a more than seven-month low of 2.14%, underperforming US Treasuries.
On the domestic macro front, there was little to stir markets, as the final German CPI for August matched preliminary readings at 1.9% year-on-year. More notably, VW scrapped its three-decade-old German jobs guarantee, which will effectively end by mid-2024, in an effort to cut costs. This follows last week’s announcement of potential plant closures in Germany, the first such move in 87 years. The end of job security commitments signals how far Europe’s largest economy has fallen behind in terms of competitiveness.
The domestic calendar remains quiet today, with the main macro focus being tomorrow’s ECB rate decision. As traders hold off ahead of the US core CPI release later today, we expect subdued spot volatility until the event. Given that the Fed has unofficially signalled a rate cut in September and overnight volatility is trading in line with recent levels, we do not anticipate fireworks outside of the usual post-data fluctuations either.
Pound softens against peers
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: September 9-13
All times are in BST
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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.
