Written by Convera’s Market Insights team
Dollar trims gains despite PMI beat
George Vessey – Lead FX Strategist
The bullish bias on the US dollar stems from US economic outperformance and rising bets of a Republican victory. Both of which have been leading US yields higher across the curve as markets price out Fed interest-rate cuts, whilst both presidential candidates are expected to expand the fiscal deficit. Consequently, the US dollar is gearing up for its biggest monthly gain in two years. With the dollar index in overbought territory though, it was no surprise to witness a pause in dollar demand on Thursday, helped by a mixed bag of US economic data.
Jobless claims came in lower than expected but continuing claims rose more than expected to the highest since 2021. Tepid regional Fed activity surveys contrasted with another solid set of PMI figures out of the US. The S&P PMI survey beat expectations on a headline basis across manufacturing, services, and the composite numbers, widening the ongoing divergence between the US and Europe. Meanwhile, US bond volatility, as measured by the MOVE index, remains elevated, also helping to lift the US dollar which has a positive correlation with it. The MOVE index has jumped higher as the US election enters the index’s horizon window. In fact, looking back on October 7, we saw the biggest single-day percentage jump since 2020, beating the day when the Fed suggested it intended to hike rates 75-basis-point in June 2022, and bigger than the collapse of Silicon Valley Bank in March 2023.
Why the jump on October 7 with no obvious catalyst? Because on that date, for the first time, the new one-month option in the MOVE index expired after the election vote. This highlights that the market sees an extreme risk of yields jolting in the aftermath of the election. We’re seeing similar moves playing out in the FX space with EUR/USD relative hedging costs in the next two weeks hitting a 7-year high.
Pound claws back on rates outlook
George Vessey – Lead FX Strategist
It was a choppy day for the pound on Thursday, which found support with rising 10-year UK gilt yields to 16-week highs. Reports suggested UK finance minister Rachel Reeves may allow more borrowing in the upcoming budget, which could delay Bank of England (BoE) rate cuts. GBP/USD climbed throughout the day before running out of steam shy of $1.30.
The most hawkish BoE rate-setter Catherine Mann also warned that the UK may have prematurely cut interest rates, which might have supported the pound somewhat too. However, the flash PMI numbers out of the UK were weaker-than-forecast across the board, likely limiting gains. Private sector growth overall slowed to an 11-month low with the composite PMI at 51.7 in October, down from 52.6 in September. Services saw slightly faster growth than manufacturing, but both sectors lost momentum. Overnight indexed swaps are still hesitant to price in two full rate cuts from the BoE for the remainder of 2024 though. This is helping GBP/EUR hold its 4% gains year-to-date given the dovish ECB and subsequent UK-German two-year yield spread at its highest in over 12 months.
Alongside the fall in business confidence revealed in the PMI, this morning, the GfK Consumer Confidence indicator for the UK, a measure of how people view their personal finances and broader economic prospects, fell to its lowest level year-to-date. This partly suggests that the uncertainty over the government’s tax plans means that consumer morale has yet to benefit from the better economic backdrop.
Bleak outlook for now
Boris Kovacevic – Global Macro Strategist
The euro has become purely a function of developments in the United States and is not following European macro data anymore. Global equities rebounded and US Treasury yields fell in yesterday’s session, allowing EUR/USD to move back into the $1.08 area. More options tenors are starting to incorporate US election risks with the two-week implied-realized volatility spread on the currency pair jumping to the highest level since 2017. Euro relative hedging costs therefore hit a seven-year high as the lack of a free trade agreement of the European Union with the United States puts the region in danger zone.
Eurozone Governing Council members continued to push back on aggressive policy easing with Nagel and Makhlouf saying that 1) powerful data would be needed for big rate cut and 2) that the ECB shouldn’t rush the policy easing. However, this comes at the time of grim economic data. Europe’s two largest economies continue to suffer from high interest rates, an external demand slump, and structural difficulties. The German PMI for the manufacturing sector ticked higher from a one-year high but remained well into contraction territory. The uncertain business outlook remains a drag on investment. The French barometer has now been negative for 21 months in a row with no recovery in sight. Firms future outlook remains the bleakest since May 2020.
Oil rebounds, supporting CAD
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: October 21-25
All times are in BST
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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.
