Written by Convera’s Market Insights team
Slight retracement of the optimism
Boris Kovacevic – Global Macro Strategist
A string of weak economic data points out of the US had pushed Treasury yields down and paved the way for a strong equity rebound last week. The positive momentum has not been able to spill over into Monday as yields steadied and the dollar sell-off slowed. Without any major economic releases this week, investors are focusing on central bank speak and secondary data points to gauge when the Federal Reserve will cut interest rates again.
Minneapolis Fed President Neel Kashkari noted the positive signs of easing inflation but remained cautious to declare victory too soon. Markets are currently pricing in rate cuts worth 100 basis points from the Fed in 2024. However, with bond yields having fallen by 50 basis points in just the last two weeks and core inflation remaining elevated, investors might be wishing for a Fed pivot too soon. The only data point from yesterday showed slightly improved demand for credit in the US. However, according to the lending officers’ survey, credit standards remain incredibly tight with the proportion of banks tightening standard on commercial and industrial loans at 33.9% in Q3 compared to 50.8% in Q2.
The US dollar (DXY) is trying to push higher this week and is down around 1.75% from its October highs (107.30). The currency had recorded its worst weekly fall (-1.4%) since July following a disappointing US jobs report and dovish Fed meeting last week. However, with yields starting to recover and the equity rally steadying, the dollar (DXY) has pushed above the 105.00 mark again.
EUR/USD rally stalls
Ruta Prieskienyte – FX Strategist
After crossing the $1.07 mark for the first time since mid-September last week, the euro rally has stalled amid a slight rebound in US yields and a continued stream of euro negative data. EUR/USD opened the day down by 0.2% as gloomy domestic outlook fails to provide support for the common currency.
The downturn in Eurozone business activity accelerated last month as demand in the dominant services industry weakened further. The PMIs continue to signal downside risks to Eurozone GDP growth, warning that services activity is now faltering as well, alongside a so-far sustained slowdown in manufacturing. Services PMI was unrevised at 47.8 in October, pointing to a third consecutive month of falling activity and the deepest contraction since February 2021. Demand conditions worsened, as new business volumes fell at the quickest pace since January 2021. Business confidence improved but remained weaker than its historic average. Elsewhere, new orders in German manufacturing advanced by 0.2% at the end of Q3, but large single orders—valued at +50M—once again drove the headline. Excluding this component, new orders fell on the month, by 2.2%. The trend was confirmed this morning by a downside surprise in German industrial output, which contracted by 1.4% versus the market expectation of 0.1% decline.
As the evidence remains depressed at the start of Q4, risks for the euro remain skewed to the downside. While we are looking for signs for the bottoming of Eurozone, last week’s rebound in Ifo business climate survey and yesterday’s upside surprise in the German new orders are not enough to establish a narrative shift. Markets are currently pricing in an 86% probability of an ECB rate cut in June 2024.
Failure at key level triggers sharp pullback
George Vessey – Lead FX Strategist
As we suspected, a failure to break above the 200-day moving average, located at $1.2434, triggered a sharp pullback in GBP/USD, particularly as the pair posted its best weekly performance in a year last week by rising over 2%. GBP/EUR also pulled back from 3-week highs but remains afloat €1.15 today. The pound’s recoil on Monday was aided by data showing UK construction output contracted in October, marking the second-lowest reading since May 2020.
Most of the move higher in GBP/USD last week was a result of a weaker dollar, but being a risk-sensitive currency, sterling also benefited by the rise in global stocks. It all came about though via the move lower in US yields, aggravated by disappointing US economic data. In our weekly report, we note this could be the first sign of a potential macro regime shift of a weaker US economy, but we cannot ignore the rising recession concerns in the UK. Although real incomes have turned positive, surveys have indicated a slump in output in the second half of the year and a sharp drop in job vacancies. Whilst keeping its Bank Rate at 15-year highs, the Bank of England (BoE) also cut its 2024 GDP growth forecast to zero last week, whilst other economists are warning the BoE may have already overtightened policy as money supply growth has turned negative for the first time since the data series began in 2010. Meanwhile, data this morning showed retail sales in the UK rose 2.6% on a like-for-like basis in October from a year ago, slowing from the previous month, as higher costs continued to weigh on consumer confidence.
The pound’s recovery was always going to lack momentum amid the deteriorating domestic economic conditions. On Friday this week, we expect data to show third quarter GDP was marginally negative, keeping the risk of a mild recession at the forefront of investors’ minds.
JPY still nursing BoJ-induced losses
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 06-10
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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.
