Written by Convera’s Market Insights team
Dollar falls the most in a year
Boris Kovacevic – Global Macro Strategist
It seems that investors have seen enough macro data over the past two weeks to finally commit to their call that the Federal Reserve is done raising interest rates and to position themselves accordingly. The disappointing US labor market report two weeks ago and yesterday’s surprisingly soft inflation report have pushed market expectations of another rate hike this or next year to zero percent with four cuts priced into 2024. The US 10-year yield fell through 4.5% to reach the lowest level since September, while the S&P 500 recorded its best day since April. Investors sold the Greenback accordingly with the US Dollar Index suffering its worst day of the year (-1.5%).
Yesterday’s sentiment driven capital reallocation into risk assets like the euro, pound, and equities and away from bonds and the dollar had been caused by the US inflation print coming in weaker than expected. Headline inflation came in at 3.2% in October, significantly lower than the previous print at 3.7%. However, the market moving release came with the core inflation number falling by 10 basis points to 4%. Both numbers represent the growth of prices over the past twelve months. Looking at the monthly development shows an even softer picture with headline remaining flat and core inflation rising by just 0.2% (vs. 0.3% expected).
Some leading indicators have started to turn up again, which could be reflected in a slight uptick in inflation over the coming months. Some survey based indicators like the NFIB prices paid component suggest core inflation settling at around 3%. However, given the tension in markets over the past months, investors are taking a victory lap and are celebrating the fact, that the bar for another rate hike has been set incredibly high. We will continue to follow the release of these leading indicators to see where the risks lie around US inflation not returning to the 2% target.
Dust settles after best day of 2023
George Vessey – Lead FX Strategist
The soft US CPI report hurt the US dollar and drove a risk rally which hugely benefited the risk-sensitive pound yesterday. Sterling catapulted to fresh 2-month highs against the US dollar, rising more than 1.7% to record its biggest daily gain since December 2022. The pound is softening this morning though after UK inflation data showed the annual rate slowed more than expected, from 6.7% to 4.6% in October.
The unprecedented jump in pre-winter energy bills last year and rising food costs was largely due to the fallout of the war in Ukraine. Hence today’s print is mostly a result of base effects. However, 4.6% is the lowest rate of price increases in two years and means inflation has more than halved since late last year. This also means that real wages are continuing to rise in the UK, easing cost-of-living pressures further. Services CPI inflation fell to 6.6%, from 6.9%, below the consensus, 6.7%, and the MPC’s forecast, 6.9%.The reaction from the pound has been a modest negative one though as markets increase their bets on BoE rate cutting expectations for 2024. In relation to GBP/USD, we referenced the breakout from the descending trend channel the week before last as a bullish sign, with the caveat that we needed to see a close above the 200-day moving average to maintain upward momentum.
We saw the pound slice through that resistance level with ease yesterday close but intra-day momentum indicators are flashing overbought conditions so we’re already seeing a pullback. We have the 100-day moving average, located at $1.2514 as the next potential upside target/resistance level in the short term. Over the longer-term, should we see yield differentials moving in favour of GBP and the UK avoids a recession, we feel the gravitational pull of the 200-week moving average, located nearer the $1.28 handle, could grow stronger.
EUR rallies as investors throw in a towel on USD
Ruta Prieskienyte – FX Strategist
The euro surged towards the $1.09 mark, reaching its strongest level since the end of August, as investors dumped the US dollar after data showed that the inflation rate slowed more than expected in October. Revived risk sentiment sent stocks higher, with STOXX 50 closing at a 10-week high. The dollar’s yield advantage over the euro decreased sharply. German – US 2-year spreads traded towards -175 bps which is the tightest since early August.
The common currency had already gained ground earlier in the session following the German ZEW survey print. Investor sentiment improved midway through Q4 as the expectations index jumped to 9.8 in November, from -1.1 in October. This was in line with the rise in the Sentix report earlier this month and an overall rebound in risk assets. With investor morale at an 8-month high, signs are emerging that Europe’s largest economy is reaching a turning point amid heightened economic expectations coupled with significantly more optimistic outlooks for the German industrial sector, as well as both domestic and foreign stock markets. Expectations for inflation, short- and long-term interest rates also seem to have reached turning points. The current conditions index, meanwhile, remained depressed, consistent with recessionary conditions which were reiterated by the -0.1% GDP estimate for Q3 yesterday morning.
With the calendar light on the domestic data front, investors will be keeping an eye out on the European Commission Autumn Forecasts released later today. However, the trajectory of EUR/USD ($1.0850) will continue to be dictated by developments overseas. In the absence of curveballs thrown in by US retail sales and industrial production data prints later this week, EUR/USD is looking on track for the best weekly performance in four months.
US dollar sells off
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 13-17
Have a question? [email protected]
*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.
