Written by Convera’s Market Insights team
Powell pushback just not enough
Boris Kovacevic – Global Macro Strategist
The US Dollar Index fell for a third consecutive week, after the positive month-end flows on Thursday got negated by investors focusing on the dovish aspects of Jerome Powell’s remarks and some data disappointments on Friday. While only being down around 2.5% in these three weeks, the Greenback has recorded its worst losing streak since June as investors have geared up heavy bets on aggressive policy easing from the Federal Reserve. Speculations are at a cycle-high with investors pricing in a 60% probability of the first cut occurring in March already. This has pushed the US 10-year Treasury yield below 4.2% for the first time since September, being down 80 basis points from its peak reached at the end of October.
Thursday ended what has become one of the best months for risk assets in three years and one of the best November for the S&P 500 on record as the global equity index gained more than 9%. The balanced speech from Fed Chair Jerome Powell did not constitute enough of a pushback against the recent risk rally and easing of financial conditions to spoil the positive sentiment on markets. Powell reiterated his stance that the fight against inflation was far from finished and that interest rate increases were still on the table. However, with inflation continuing to come down and economic data starting to deteriorate, investors have continued to zoom in on the dovish remarks, one of them being that risks of moving too far with interest rates have become more balanced. The PCE report on Thursday showed both headline and core inflation coming down, while Friday’s ISM PMI survey highlighted the ongoing recession of the manufacturing sector. The barometer came in unchanged at 46.7 for the month of November and has now been in contractionary territory for 13 consecutive months, recording its worst rout since 2002.
The US Dollar Index usually tends to move in line with EUR/USD given the heavy weight of the currency pair within the composite index. However, this has not been the case last week with the Greenbacks losses being generated mainly by the pound, yen, and yuan. All three currencies have been trending higher for at least three weeks vs. the dollar as EUR/USD fell from $1.1000 to $1.0870 last week. The continuation of the bearish dollar trade is dependent on the economic data coming in weaker than expected. In this context, we are focusing on US factory orders (today), the ISM services report (tomorrow) and the non-farm payrolls report on Friday. The latter could give the Greenback some relief as a bounce in jobs growth to above 180k is expected following the end of the UAW strikes.
Pound profits from new FX hierarchy
Boris Kovacevic – Global Macro Strategist
Global investors are currently in the game of assigning a hierarchy to G10 central banks based on their likelihood of easing policy in 2024. The faster inflation falls, the more rate cuts are priced in, and the more the respective currency is expected to weaken going forward. The Fed and ECB have led the pack in this regard as of late. This newly emerged FX theme has given the British pound the opportunity to break out of its usual correlation with EUR/USD and to push higher against both the euro and dollar.
This is exemplified by GBP/EUR recording its best week this year on Friday, rising by 1.4% and extending its two-week rise to 2.3%. At €1.1670, the currency pair is positioned in the upper 75% trading range on the 3- 6- and 12- month horizon with the high for this period being around €1.1730. The push higher has not been limited to the euro with GBP/USD trading just above the $1.27 mark. With UK data being relatively scares, this rise has mostly been a function of US and Eurozone inflation falling. The disinflationary trend has accelerated in the United Kingdom as well in October with consumer price growth dropping from 6.7% to 4.6%. However, both core and headline inflation remain well above its peers, resulting in markets pricing in less rate cuts from the Bank of England versus the Fed and ECB.
The upcoming week will once again be dominated by events in the Eurozone and US. The UK will become front and center the week after, with both GDP and labor market numbers coming up. In the meantime, sentiment will rule the pound with both GBP/USD and GBP/EUR being dependent on the continuation of the current bullish risk on sentiment.
Euro under pressure despite a surge in optimism
Ruta Prieskienyte – FX Strategist
Last week’s euro volatility has mostly been dictated by US dollar moves, central banks’ rate expectations and a rebound in risk appetite. Cooler than expected inflation in Eurozone pulled EUR/USD back from its 3-month high, while European stocks touched a 4-month peak after inflation data on both sides of the Atlantic sparked speculation of potential rate cuts by both the European Central Bank (ECB) and the Federal Reserve (Fed).
The latest inflationary report revealed that the inflation rate in the Euro Area fell to 2.4% in November, marking the lowest figure in over two years and falling below the consensus of 2.7%. The core rate also eased to 3.6%, below expectations of 3.9%. Subsequently, markets were well underway to declare the fight against inflation done, even if the ECB is not ready to do so just yet as it awaits a confirmation from updated December staff projections. The bloc is feeling the strain of the recessionary conditions, with Q3 GDP flash estimate released last month showing a contraction of 0.1% for the first time since 2020. Having said that, several leading indicators are taking a favourable turn and European macro data tend to surprise expectations in H2. An increasing probability of a bottoming of the European business cycle lessens the need for ECB to hold onto its hawkish mantra. Investors increased their bets of March rate cuts, with probability of an active meeting currently firmly over 50%, and over 130bps of cumulative rate cuts are priced in for the whole of 2024.
Looking ahead, the week will be filled with some top tier data releases and central bank meetings. Polish central bank is due to hold a rate decision on Wednesday and is expected to maintain the policy rate at 5%, having already cut 100bps since August this year. For the euro area, we will be keeping a close eye on the consumer inflation expectations and final composite PMIs out tomorrow.
GBP/EUR at top end of weekly range
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 04 December
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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.
