Written by Convera’s Market Insights team
This week is all about the US labor market
Boris Kovacevic – Global Macro Strategist
The slowdown of inflation across the globe and central banks ending their aggressive tightening cycle in November has shifted focus to 2024, with investors having started pricing in significant rate cuts from the Federal Reserve, European Central Bank and Bank of England. Last week saw US and Eurozone inflation fall to 3% and 2.4% respectively. The disinflationary trend has taken hold in other countries as well. Newly released consumer prices increased less than expected in November in South Korea (3.3%), Switzerland (1.4%) and Tokyo (2.3%) with inflation getting ever closer to target (2%). This has fueled the rally in risk assets, which saw global equities rise the most in three years and the dollar recording its worst month in November.
Yesterday saw some negative price action in what looked like buyers fatigue and overly stretched cross-asset positioning. The US dollar is gaining its footing, after having fallen for three consecutive weeks with US Treasury yields trading higher by around 10 basis points across the curve versus the Friday close. Not much has happened on Monday as the lack of data has meant that investors remain on the side lines and on the look out for new catalysts. The main question going into December continues to be how likely the 125 basis points of rate cuts by the Fed for 2024 priced in by markets are to materialize. This week will be all about the US labor market with four data points coming into focus.
The ISM Services PMI will start the week off as the subcomponent tracking the development of employment in the sector being closely watched. Today will also see the release of US job openings, which are expected to continue cooling from above 9.5 million to 9.3 million. The ADP private payrolls report on Wednesday and initial jobless claims on Thursday might give us some indication of how likely the US non-farm payrolls number on Friday is to deviate from expectations.
Pound retraces in uneventful trading
Boris Kovacevic – Global Macro Strategist
The pounds 5% rally versus the US dollar since the beginning of October is starting to lose steam as GBP/USD has stagnated around the $1.2650 level for five consecutive days now. GBP/EUR has pushed lower on Monday as well, after having peaked at a four-month high around the $1.6800 level. The retracement seems to be of technical nature as the lack of economic data releases and central bank speeches has given investors an opportunity to take profits and to go into a more neutral position before the important US labor market report on Friday.
The inflation picture has been all that mattered during the last few weeks and the pound has profited from the still high inflation rate in the United Kingdom keeping investors that are trying to price in more rate cuts for the Bank of England at bay. The next inflation report will be released in exactly a week. In the meantime, investors will focus on secondary data points to gauge where the UK economy is headed. Governor Baileys speech and the Financial Stability Report from the Bank of England will be in focus tomorrow with attention shifting to housing data on Thursday. However, sentiment and the dollar dynamic will continue to be the main drivers of the pound this week.
GBP/USD at $1.2650 is still positioned at the upper end (85%) of its 1- and 3- month trading range. While investors are still net-short the pound, the speculative positioning as a percent of open interest has improved in recent weeks as the currency pair jumped above its 50- and 100-week moving averages.
Euro loses further momentum
Ruta Prieskienyte – FX Strategist
The euro started the week on the defensive against the US dollar as ECB doves continue to put downward pressure on the common currency amid cooler than expected inflationary print last week. EUR/USD declined for the fifth consecutive day, falling to a 3-week low around $1.0820. European stocks hovered at 4-month high and German 10-year government bond yield reached its lowest level since mid-July.
The Sentix Investor Confidence Index revealed that Eurozone investors’ morale improved for the third straight month in December. The headline index climbed to a 7-month high at -16.8 in December from -18.6 in November, a slight amiss against market consensus. This was in line with the rise in the ZEW index reported last month and an overall rebound in risk assets. While a recent turn in a number of leading indicators gives something to cheer about going into 2024, the current situation remains dire, and momentum is weak. The headline Sentix index has remained in a negative territory for 22 consecutive months, the length only comparable to the GFC. Germany specifically remains the laggard among the world regions analysed by the survey, with the value for investor confidence index for the region undercut only during the 2008 financial crisis and during the COVID-19 pandemic. Meanwhile, several ECB policymakers cautioned markets against declaring victory against inflation, pushing back against rate cut expectations. Vice president Guindos remains concerned about a rise in wage growth in parts of the euro zone, which remains one of the concerns regarding the future evolution of inflation. As an example, real negotiated wage growth in Netherlands is at 9% y/y – the fastest growth since 1998.
Moving on, markets will keep a close eye on the final EZ PMIs prints due shortly this morning as well as US ISM Services PMI later this afternoon. The RSI on EUR/USD suggests that further bearish momentum may have further to run if data from across the Atlantic were to surprise to the upside. However, 200-day SMA at $1.0818 might provide support and halt the downward price selling pressure.
CAD neutral as awaits BoC decision
Ruta Prieskienyte – FX Strategist
The Canadian dollar weakened from the 2-month highs against the US dollar amid dampened risk appetite. In fact, CAD performance against its G10 peers has been nothing but disappointing this quarter, with CAD/CHF and CAD/GBP down by 4.2% and 3.7% respectively since the start of October.
Recent economic indicators from Canada hinted at an economic slowdown, placing pressure on the Bank of Canada (BoC) to lean towards a dovish monetary stance. The Canadian GDP contracted by 1.1% in annualized terms in the Q3 of 2023, its first contraction since Q2 2021, and contrasting significantly from market expectations of a slight expansion. Month-on-month increases have virtually stalled since June. Meanwhile, the latest unemployment figure climbed to an almost 3-year high at 5.8% and October consumer inflation continued to trend lower to 3.1% on year-on-year basis. A recessionary domestic environment has markets leaning towards potential interest rate cuts by the BoC going into next year. BoC governor Macklem admitted that the current policy rate is restrictive enough to tame inflation and weak economic outlook over the next few quarters is likely to put more downward pressure on the consumer prices.
All eyes are on the upcoming monetary policy decision scheduled for Wednesday with the central bank expected to end the year with another interest rate hold at 5%. Given deteriorating growth outlook, markets are likely to shrug off any threat of future hikes as improbable and are pricing in over 100bps cumulative rate cuts for 2024, with March expected to be an active meeting. Ahead of the risk event, intraday USD/CAD remains neutral for the moment at $1.356 with support at 200-day SMA situated at $1.3516.
CAD/USD weakens from 2-month highs
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 04 December
Have a question? [email protected]
*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.
