Written by Convera’s Market Insights team
Check out our latest Converge Market Update Podcast which looks at how this week’s rare mainstream media appearance from Fed chair Jerome Powell has impacted markets, why the US economy continues to outperform, and whether wages growth might be more important than inflation this year, featuring Head of Market Insights Steven Dooley.
Inflation revisions in focus
George Vessey – Lead FX Strategist
The US dollar index snapped a two-day decline yesterday, supported by yet more positive economic data from the US. The biggest gains were seen against the Japanese yen as yields differentials widened, with USD/JPY rising to 10-week highs. Meanwhile, global equities stretched higher with the tech-heavy Nasdaq 100 and the S&P500 reaching fresh record highs. The main event today is US CPI benchmark revisions, which could tigger some volatility ahead of the Lunar New Year holiday.
We continue to get positive economic surprises in the US, which supports the Federal Reserve’s (Fed) message that interest rates will not be cut in the near term. Yesterday we saw the number of Americans filing new claims for unemployment benefits fell more than expected. Despite a recent spike in layoffs, the US labour market remains strong, with wage growth outpacing inflation, which is keeping consumer spending robust. But growth momentum is moderating and there remains a disconnect between strong official data and weaker business surveys while the Conference Board’s leading index remains at levels historically consistent with a recession.
Treasuries continue to fall despite strong demand in a $25 billion sale of 30-year bonds yesterday. Yields pushed higher across the curve, supporting dollar demand. In the short-term, the dollar could strengthen further if today’s consumer-price index revisions are significant enough to cast doubt on overall inflation progress. Market participants are on edge given last year’s drama, although the amount of modifications will probably be minimal.
Pivotal UK data dump next week
George Vessey – Lead FX Strategist
Sterling slipped against the US dollar yesterday, testing its 200-day moving average amid renewed dollar demand. The currency pair bounced off this key level, but still clocked a daily decline and remains over 1% below its year-to-date high. Sterling also dropped against the euro, but cling onto €1.17, though GBP/JPY advanced to 2-week highs.
This week, we’ve seen UK labour market data revealed the unemployment rate was 3.9% in the three months through November, well below the 4.2% estimated using previous data. As the labour market has not loosened as much as thought, possibly putting more upward pressure on wages and prices, this might persuade the Bank of England (BoE) to wait a few more months before starting to cut interest rates. BoE policymaker Catherine Mann raised concerns yesterday about whether the near-term deceleration in headline inflation will continue, but did signal her vote to raise interest rates was a close call last week. Flash UK inflation figures are due next week, alongside the UK jobs report and retail sales, all of which could jolt the pound.
In the short-term, seasonality and positioning don’t look constructive for sterling and a move back towards $1.25 can’t be ruled out next week, especially if UK inflation continues its descent and given the resilient US economy.
ECB April rate cut now a coin-toss probability
Ruta Prieskienyte – FX Strategist
Euro remained broadly unchanged at $1.0770 against the US dollar for the lack of market moving calendar yet again. In fact, the whole week could be characterized in such a manner, with the normalised bid high to low ratio for EUR/USD rate registering only 0.6% – the lowest weekly volatility in close to 5 ½ years. Elsewhere in markets, the STOXX 50 reached a fresh 23-year high and German 10-year bond yield advanced to a 3-month high above 2.364%.
The first ECB Economic Bulletin of 2024 showed that, after stagnating in 2023, the euro area economy is expected to start growing again from the first quarter of this year, but risks remain skewed to the downside. Incoming data shows signs of a modest strengthening of growth in Q1, as confirmed by largely improving leading sentiment indicators such as the Sentix index, and the labour market remains resilient with unemployment rate at record lows at 6.4%. Meanwhile, the disinflation process was expected to continue throughout 2024, but geopolitical tensions, resilient profit margins and stronger-than-expected wage increases remain the key upside risks. On the latter, the message was echoed by the ECB’s Wunsch concerns who voiced that “if it wasn’t for the increase in salaries, monetary easing could already begin”. He expressed strong preference for waiting for more data — particularly on workers’ pay — before deciding to start cutting interest rates. Over the past several days, the markets have pulled back significantly on their ECB easing expectations and the market implied probability of an April rate cut now lies barely above a coin-toss, or at 51%.
Across the FX space, EUR/CZK surged to the highest level since May 2022 as Czech central bank cut policy rates for the second time. EUR/GBP is on track to depreciate for the 7th consecutive week in what has been the worst consecutive weekly performance in almost 19 years. Meanwhile, EUR/USD is facing resistance at 100-day SMA at $1.0785, with no strong catalyst to break through the barrier just yet. That could very well change in tomorrow’s US CPI revisions, the first annual CPI component weight adjustment since the introduction last year. But for now, EUR/USD is looking to depreciate for the fourth consecutive week – the longest bearish streak since end of August 2023.
Global equities stretch to record highs
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: February 05-09
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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.
