Written by Convera’s Market Insights Team
Dollar on track for best week since May
Boris Kovacevic – Global Macro Strategist
Financial markets continued to start the year with a clear reversal of the positive momentum from 2023 with the US Nasdaq staging its first five-day loss since December 2022 and the US dollar benefiting from the broader risk off sentiment. Markets were also more cautious ahead of tonight’s non-farm payrolls report. The US labour market has remained resilient – yesterday’s ADP employment reading and weekly initial jobless claims both beat expectations – while jobs growth has been stronger than forecast in three of the last four months.
This led investors to slightly revise their expectations of how much the Federal Reserve would cut interest rates this year with the likelihood of policy easing coming as early as March falling from 86% to 65%. This has in turn pushed US yields on the front end higher, while also putting pressure on global equities. The US dollar has benefited from both developments and is on track to record its best week since May. This bout of strength is likely to continue if today’s jobs number beats expectations.
Private employers hired 164 thousand workers in December and around 50 thousand more than economists had expected. The data beat was followed by initial jobless claims showing less people registering for unemployment benefits (202k vs. 216k expected) in the week ending December 30th. The consensus expects the US economy to have added 150 thousand people to its workforce in December, 49k less than during the previous month.
Short-term reflation in Europe
Boris Kovacevic – Global Macro Strategist
FX traders have largely ignored the rebound of inflation in France and Germany in December as the implications on monetary policy remain limited due to the expected disinflation in the first half of 2024. However, the short-term reflation has created some volatility on fixed income markets with the German 10-year government bond yield rising by the most since March (+0.13) to 2.13%. The positive effect on the euro has been limited as the risk-off environment created by higher interest rates this week overshadowed any potential benefit from rising Bund yields.
German inflation rose from 2.3% in November to 3.8% in December, partially driven by the upward pressure from energy base effects. Last December saw the government introduce an emergency aid program to help households cover monthly gas and heat expenses via deductions. This pushed down energy prices, which has created a low base from which inflation has rebounded on an annualized basis. Core inflation continued its slow but steady descent to 3.5%, having fallen for six consecutive months. French inflation edged higher as well with price growth being pushed higher by the services sector and energy. Inflation rose from 3.9% to 4.1% with the monthly change printing a benign 0.1% gain.
While investors are looking beyond the data prints, the question of when and how much the European Central Bank will ease monetary policy continues. Policy makers like Spanish central bank governor Pablo Hernandez de Cos have recently pointed out the importance of the future evolution of data in the context of driving this decision with his Austrian colleague warning about premature cutting bets. EUR/USD will most likely end the week below the $1.10 threshold, suffering a 1% decline since last Friday. The minor upward trend in both global equities and the euro starting from November is still intact, with the trend line currently around $1.09. A breach of this support level would put the focus on $1.0850 and support the narrative of a rebounding dollar.
Pound stronger versus the euro
Boris Kovacevic – Global Macro Strategist
The pound struggled to regain lost ground versus the dollar this week and is on track for its first weekly fall since the beginning of December. GBP/USD has been oscillating between $1.26 – $1.27 for six consecutive weeks now, displaying range bound behavior due to the uncertainty regarding the monetary outlook of the Federal Reserve and Bank of England. The economic picture is much more complicated in the United Kingdom versus the clearly weak momentum in the Eurozone, explaining why the pound has held up better versus the Greenback compared to the euro.
While the British economy is weakening in line with higher interest rates and the slowdown of the global business cycle, some pockets of hope have been visible in the data. Inflation continues to fall but remains well above its G10 peers and the BoE’s target. At the same time, the UK’s composite purchasing manager index remained in positive territory for a second consecutive month. This explains this week’s rise of GBP/EUR to just below the €1.16 level, which has acted as an anchor for the past few weeks. The currency pair is currently trading slightly above its 2023 average of around €1.15, which is surprisingly also its post-pandemic average.
Key global risk events
Calendar: January 01 – 05
