Written by Convera’s Market Insights Team
Markets unimpressed by hot CPI report
Boris Kovacevic – Global Macro Strategist
The recent outperformance of US macro data in the form of the non-farm payrolls report and yesterday’s inflation print have made it less likely that the Federal Reserve would cut interest rates in March. While both data releases have been ambiguous and left room for interpretation, showing some pockets of continued weakness, the strong headline numbers will be enough for policy makers to push back against market pricing. Investors remain convinced of their believes and didn’t budge after yesterday’s data with six rate cuts still being priced in for 2024.
The US dollar ended the day unchanged, showing how more impulses will be needed to move FX markets in one or the other direction. US equities did fall on the inflation news, but this week’s retracement of US Treasury yields will most likely secure stock benchmarks a strong weekly performance. Both the S&P500 and Nasdaq are just basis points away from their record highs.
So, looking more closely at yesterday’s macro headline, consumer prices came in hotter than expected. US inflation increased from 3.1% to 3.4% from a year earlier in December, beating expectations of a 3.2% rise. Shelter costs continued to make up two-thirds of the increase with some unusual outliers like care insurance recording its highest annual increase in almost 50 years. Premiums have risen 20% over 2023 and accounted for 15% of headline price increases in the last quarter of 2023. However, core inflation continued to fall, moderating to sub 4% levels.
The 3-month annualized inflation rate has fallen to below 2% for the first time since 2020 in a sign that the CPI report has not been as bad as the headline would suggest. Overall, we think that the inflation print changed neither the Fed’s nor investors views about monetary policy, which explains the lack of reactions on FX markets. Cleveland Fed President Loretta Mester already came out following the print saying how sticky inflation would mean that it would likely be too early to cut policy in March.
EUR holds steady as US inflation beats forecasts
Ruta Prieskienyte – FX Strategist
European equities surrendered ground as traders pulled back on Fed rate cut bets following a stronger-than-expected US inflation print and an unexpected decline in jobless claims. Widening German-US 2-yr spreads capped EUR/USD gains, which closed the day flat and below the $1.0980 level.
Investors remained focused on insights from various European Central Bank’s (ECB) policymakers given a muted domestic calendar. A number of policymakers expressed their views on the future rate trajectory over the course of this week and the takeaway is clear: the Governing Council is nowhere near a cohesive consensus. The doves continue to caution markets against premature rate cut speculations, warning that inflation is far from the ECB’s 2% target, let alone their definition of price stability, and engaging in rate cut discussions is premature. Meanwhile, some hawks are open to rate cuts in 2024 and potentially as early as H1.
Yesterday the more hawkish-oriented Boris Vujcic reiterated that any talk of a rate cut before crucial first quarter wage data due in May would be premature. Nonetheless, March meeting continues to be of heightened importance as by then policymakers will have plenty of new data, new economic projections and will also have the bulk of the first quarter’s wage deals. Markets now see 145 basis points of rate cuts in 2024 with the first move coming in April, to be followed by a 25 basis point cuts at most if not all meetings this year. While such pricing is largely detached from the ECB’s, the central bank does not appear to be overly concerned with such discrepancy. The ECB sees inflation oscillating in the 2.5% to 3% range for much of this year, but policymakers could act quickly if price growth takes an unexpected dive in the coming months.
Given mixed price movements, EUR/USD is looking to end this week on a flat note, range bound between $1.0930-$1.0100. EUR is looking to gain close to 1% against AUD on weekly basis after weak an Australian inflation print. EUR/JPY reached fresh 5-week highs above ¥160 amid broad JPY weakness and is looking to close over 1% higher w/w for a second consecutive week.
UK returns to growth, with a caveat
Boris Kovacevic – Global Macro Strategist
The British economy returned to growth in the month of November, after having fallen in the previous period. The fall of economic activity in October raised fears about the UK falling into recession. However, today’s GDP report showing a monthly rise of 0.3% in November is in line with the recent recovery of the purchasing manager index and will be welcomed news for British policy makers. The 3-month average growth rate dipped into negative territory for the first time in 2023, after having been flat for two consecutive months. Both industrial and manufacturing production disappointed, with the former falling by 0.1% and the latter rising by less than expected (1.3% vs. 1.7% exp.)
The pound initially reacted negatively to the report and is now trading slightly lower. It is hard to blame the GDP print as GBP/USD and EUR/USD have both turned down in parallel in the Asian session. One reason might be the negative wave of headlines coming from other parts of the world. Markets are struggling to price in the implications of the US and UK launching strikes against Houthi rebels in Yemen, with the Iran-backed militia having already responded with confirmation of further escalations. At the same time, China continues to underperform expectations, which could be a drag on sentiment and the British pound. Chinese exports dropped by 4.6% from a year ago, recording their first negative growth rate since 2016. Inflation marked its longest streak of declines since 2009 with producer price inflation having been negative for the whole of 2023.
GBP/USD had peaked in the Asian session at around $1.2785 and has since then trended lower to $1.2760. Zooming out a bit, the currency pair is still positive on the day and is on track to record its seventh daily rise in eight. The upward trend established back ion November is still intact. However, a break above $1.28 is needed for further upside potential. The pound is the best performing G10 currency so far this week, having risen against all other currencies in this category. The macro driven strength of sterling continues.
Pound as the best performer within G10
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: January 08 – 12
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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.
