Written by Convera’s Market Insights Team
Markets paring back Fed easing bets
Boris Kovacevic – Global Macro Strategist
Global markets started the year on the defensive as the continued resilience of the US consumer and rebounding inflation rates across the world reduced the likelihood of major central banks starting to ease monetary policy in the first quarter of the year already. The US dollar reached its highest level since the middle of December in yesterday’s trading against the backdrop of rising bond yields and falling equity prices. However, the dynamic has already reversed overnight in the Asian session as the Greenback gave back some of its macro and monetary policy driven gains.
The initial cause for the risk-off sentiment was the stronger than expected retail sales report. Consumer spending increased by 0.6%, beating the previous gain of 0.3% and exceeding the consensus forecast of 0.4%. The data point was followed by a positive surprise in the industrial production numbers, which increased by 0.1% in December against the expectation of a flat print. The last release completed the trifecta of better than expected US macro data on Wednesday with the NAHB Housing Market Index. Sentiment in the property sector surged from 37 to 44, recording the best month since September.
Given this positive string of data and relative hawkish Fed speak as of late, is it interesting to see that the dollar pared back all its intra-day gains to close the day flat. The Greenback has risen by 2.7% since the 28th of December and has already incorporated some therefore of the risk off sentiment. However, with the probability of a March rate cut by the Fed having fallen from above 80% last week to now just 50%, the dollar seems unusually indifferent. This could suggest a limit to how much more investors are expected to par back their bets of aggressive policy easing.
Markets hit by ECB pushback
Ruta Prieskienyte – FX Strategist
European markets edged lower on Wednesday as investors continue to second-guess previous bets of imminent rate cuts by key central banks. For a number of weeks, a whole host of European Central Bank (ECB) speakers have tried to push back against the current market pricing in vain, but it appears that only Christine Lagarde is able to talk some sense into markets.
In an interview at Davos, the ECB President noted that the central bank’s first-rate cuts are likely due in summer, adding that more evidence of disinflation is needed to warrant looser policy. Governing Council member Knot also stated that markets have overestimated the extent of projected rate cuts, allowing for financial conditions to unintentionally loosen and risk the necessity of a hawkish response from the central bank. The warning echoed other hawkish signals this week.
Despite a confused messaging, the Governing Council at least agree on one point – there will be no rate cuts in the imminent future. As a consequence, Eurozone bond yields increased across the curve as markets reduced rate easing expectations by the ECB. The probability of a rate cut in April declined to 75% and the money markets have also pulled back on cumulative rate cut speculations for 2024 and are pricing in 134bps (-16bps d/d) worth of easing. That is equivalent to five quarter-point cuts, compared to six reductions seen last week.
Overall, the Stoxx 50 index sank 1.2% on the day to its lowest since late November, while the German 10-year Bund yield extended gains towards 2.3%, touching its highest level since December 8th, as rate-cut optimism wavered. Meanwhile, the euro further depreciated against the US dollar for the fifth consecutive day. EUR/USD settled around the 200-day SMA of $1.0850s, marking a fresh 5-week low amid wider USD strength. Elsewhere, EUR/GBP depreciated to a 1-week low as British Pound enjoyed a bounce after the December UK CPI figure came in higher than expected. On a whole, ECB’s hawkish comments and realised expectations benefited the common currency against most other G10 peers, with EUR/JPY and EUR/CHF gaining 0.6% and 0.5% d/d respectively.
GBP/USD holds above key $1.26 level
Boris Kovacevic – Global Macro Strategist
The macro week has been mixed for the United Kingdom so far. We kickstarted a crucial week filled with tier one economic data releases with a disappointing labor market report weighing on the British pound. This put GBP/USD under pressure and caused the currency pair to touch the 50-day moving average for the first time since the middle of November. However, momentum turned with the release of the CPI report, which showed inflation across the board accelerating as the services sector continued to drive price growth higher.
Investors pared back their expectations of Bank of England rate cuts for 2024 with the UK 2-year government bond yield rising by the most in almost a year on Wednesday. Short-term yields were up 19 basis points on the day and had risen from 4.19% to 4.38% as the hot CPI report pushed out the first rate cut by the BoE by two months. Overall, investors took out around 18 basis points out of the BoE’s 2024 easing cycle yesterday. GBP/USD has been supported by this move and has pushed from $1.26 to $1.2670 and the pound continued to outperform the rest of the G10 space. GBP/AUD is on track for its 11th appreciation over the past 12 days with GBP/EUR having shortly risen to the highest level so far this year at €1.1670. Investors will now turn their attention to the British retail sales report on Friday, which will close out the macro week in the United Kingdom.
CAD at 5-week low
Ruta Prieskienyte – FX Strategist
The Canadian dollar weakened past the $1.3500 barrier against the US dollar as falling crude prices and weak Chinese data weighed on the Loonie. The yield on the Canadian 10-year government bond jumped to 3.44%, the highest in six weeks, tracking the sharp rise in US Treasury yields as recent economic data backed the increasingly hawkish signals from Federal Reserve and Bank of Canada (BoC) members. Traders are backtracking their bets on early policy easing, with probability of a BoC cut in April further declining to 61%, down from 66% yesterday. The cumulative rate cut speculations for 2024 also eased, falling by 10bps d/d to 106bps as of this morning.
On data front, industrial producer prices in Canada fell by 1.5% m/m in December of 2023, compared to market estimates of a 0.7% drop – the sharpest decline since July 2022. This was the third consecutive month of producer deflation, mainly due to plunging cost of energy and petroleum products amid concerns about future oil demand and elevated global petroleum supply. On annual basis, producer prices plunged by 2.7% in December. This contrasted with the annual consumer inflation rate published on Tuesday, which rose by 30bps to 3.4% in December compared to the previous months. Given that PPI tends to precede CPI, signs are pointing to further disinflationary effects to come.
After the worst daily losing streak in 5 months’, the Canadian dollar is enjoying a brief moment of relief as of this morning. Yesterday, USD/CAD closed around $1.3500 level, touching a 5-week high, before retreating in this morning’s European session and is already down 0.1% around the 100-day SMA support level. We expect another active day in the market with plenty of US data out shortly. In addition, Fed policymakers John Williams, Michelle Bowman, and Michael Barr are speaking. The bullish USD/CAD momentum in place since 27th December is running out of steam, but there could be further upside potential in the immediate future. However, gains are capped at 200-day SMA resistance level around $1.3566.
Key global risk events
Calendar: January 15 – 19
Dollar, pound, euro strengthen versus G10
Table: 7-day currency trends and trading ranges
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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.
