Written by Convera’s Market Insights team
Light positioning before crucial CPI report
Boris Kovacevic – Global Macro Strategist
Investors remained cautious and lightly positioned in anticipation of the US inflation print later today and the lack of economic data driving markets at the weekly open yesterday. The report will most likely show core inflation stuck at 4.1% in October, while the headline number is expected to have fallen to 3.3%. The Federal Reserve has recently paused its tightening cycle but has not taken further rate hikes off the table. This data dependent stance makes the inflation print a potential market moving event, as an upside surprise could trigger a more hawkish rhetoric from the central bank.
Inflation expectations from two important surveys have recently moved in opposite direction. The Michigan University’s consumer survey published last week showed five-year inflation expectations rise to 3.2% in October, reaching the highest level since March 2011. While gasoline prices have fallen by more than 10% from their recent highs, consumers continue to expect higher energy prices. Yesterday’s New York Fed survey, however, did show five-year inflation expectations falling from 2.8% in September to 2.7% in October. The upcoming print will therefore be important to confirm if disinflation has stalled or if there is room for price growth to continue falling in the medium term.
The US dollar has stalled its recent downward trend that started at the beginning of October and that accelerated after the weak US jobs report and the Fed pausing its tightening cycle two weeks ago. The losses have been limited at around 2.3%, given that the weak performance of other currencies leaves investors with no good reason to sell the Greenback. Going into the CPI report, investors price in a one in four chance of a rate hike from the Fed in January.
Pound boosted by cabinet shuffle and wage data
George Vessey – Lead FX Strategist
This morning, data showed that UK wage growth is slowing and vacancies continue to fall in a further sign that the labour market is easing as the British economy flirts with recession. However, although average weekly earnings, including bonuses are a 4-month low, the rise of 7.9% y/y was above market forecasts of a 7.4% rise. The biggest gain was recorded in the public sector (8.6%), while wages in the private sector rose 7.8%. The pound is on the march higher, set for a third day of gains as it reclaims $1.23 against the USD.
The pound started the week off strong after a cabinet reshuffle saw Prime Minister Rishi Sunak sack interior minister Suella Braverman and appoint former PM David Cameron as foreign minister. The move constitutes a very risky bet by Sunak as he looks to appeal to centrist voters ahead of a general election expected in 2024. It also awakens divisive debate over Brexit because Cameron had campaigned for Britain to stay in the EU after calling the referendum himself. The cabinet shuffle itself shouldn’t have economic or market implications, but investors are likely pleased to see Chancellor Jeremy Hunt maintaining his position before next week’s fiscal statement. In the meantime, six of the nine Bank of England MPC members are scheduled to speak over the next week, which could steer sterling’s direction.
Policymakers will be concerned with the fact the UK labour market remains tight by historical standards and wage growth is still well above levels compatible with the 2% inflation target. Tomorrow, the UK inflation report is published, with services inflation in the spotlight.
EUR on defence awaits next catalyst
Ruta Prieskienyte – FX Strategist
The euro held its ground near the $1.07 level with little in the way of news. While the European bond market was quiet, stocks advanced with STOXX 50 up by 0.8% on the day and closed at a 8-week high. Investors are awaiting a slew of economic reports due for release this week, especially the CPI reports after Powell doubled down on the Fed’s fight against inflation last week.
As usual, there is a raft of European Central Bank speakers too. Yesterday ECB’s Vice President De Guindos acknowledged that it is likely that the euro area economy will remain subdued in the near term as weaker industrial activity is spilling over into services. Even the labour market, the bright spot in the bloc’s economy, has started to show signs of weakening as the latest German unemployment rate rose to the highest level since June 2021. De Guindos comments came off as slightly more conservative than Christine Lagarde’s speech on Friday, who hinted that that even if inflation picks up, another rate hike may not be needed. The central bank is slowly coming to terms that the economy is starting to buckle under the strain of record high interest rate hikes in an attempt to slow consumer demand and push inflation back to its 2% target. As the ECB policymakers continue to hold onto a more hawkish rhetoric, the market has moved on and is now firmly exploring the idea of three ECB cuts in 2024. That is quickly raising the prospect that EUR/USD never gets a chance to rally next year if the ECB cuts rates quicker than the Fed.
Looking ahead to today’s event, all eyes are on the 2nd estimate of Q3 GDP for the Eurozone, ZEW sentiment index and US CPI print for October. If CPI were to come in soft, investors might be tempted to disregard last week’s hawkish Fed rhetoric and pull forward expectations for the first rate cut, which could give euro a sustained boost over and above $1.07.
Aussie under the cosh
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 13-17
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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.
