Written by Convera’s Market Insights team
Fed speak still matters
Boris Kovacevic – Global Macro Strategist
The US dollar is heading for its worst month this year as investors have piled into bets that the Federal Reserve (Fed) will be easing monetary policy more aggressively in 2024. Expectations for the first interest rate cut have been brought forward to May and have accelerated the fall in US yields and the US dollar, with the latter extending its November losses to 3.7%. The move lower looks stretched in the near term, but the dollar remains sensitive to any signs that would confirm the markets bias for a more dovish Fed going forward. The three US data releases that we’ve had so far this week failed to spark any meaningful volatility. However, yesterday was a good reminder that Fed speak continues to matter, especially when it reaffirms market expectations.
Comments made by Fed Governor Christopher Waller in particular seem to have set the tone for markets yesterday afternoon, when the policy maker said that he felt increasingly confident that the current level of rates is sufficiently restrictive to bring inflation closer to the 2% target. Chicago Fed President Austan Goolsby emphasized the recent progress in bringing inflation down with Governor Michelle Bowmann suggesting that she would not push for another rate hike if the progress on the inflation front continues. This string of cautious optimism has been welcomed with investors having already fully leaned into the idea of the Fed being done raising interest rates.
The US macro data continues to paint a mixed picture. This ambiguity in the data has allowed investors to position for a soft landing, while at the same time pricing in rate cuts from the Fed. Consumer confidence rose for the first time in four months with the index published by the Conference Board rising from 99.1 to 102. The perceived likelihood of a recession occurring over the next year fell to the lowest level this year. However, the consumer expectations index has been below the 90 mark for 23 consecutive months now, something that occurred in only two periods since the 1970s. The labor market conditions index (jobs plentiful vs. jobs hard to get) did not change much and continues to point to falling job openings and a higher unemployment rate in the medium term.
Pound tests $1.27, up from $1.21 this month
George Vessey – Lead FX Strategist
The British pound has risen almost 5% against the US dollar in November, its biggest monthly rise since November last year. Trading above $1.27, this extends the winning streak of higher highs and higher lows to four consecutive sessions as USD weakness gathers pace.
Although it’s mostly US developments driving markets at present, some more hawkish commentary from the Bank of England (BoE) this week has helped the pound. BoE’ policymakers pointed out that services inflation, which makes up 45% of the consumer inflation basket, is proving much stickier than expected and therefore interest rates would remain high for an extended period. Money markets are still pricing around 60 basis points of policy easing from the UK central bank by the end of 2024, but that equates to around two less rate cuts compared to what’s being priced in for the Fed and ECB. Still, we think the pound is mainly reaping the rewards of the global risk rally more than anything, evidenced by its lacklustre appreciation against the euro and depreciation against its riskier Antipodean and Central Eastern European peers of late.
The 200-week moving average of GBP/USD is located at $1.2843 and given the positive momentum of the currency pair right now, we cannot rule out a test of this level in December. However, similar to that of EUR/USD, the probability of a correction lower from these levels appears elevated given the overbought conditions on the daily relative strength index.
Euro briefly breaks above $1.10
George Vessey – Lead FX Strategist
The euro extended higher against the US dollar yesterday after dovish Fed comments spurred a renewed risk rally. The euro’s volatility of late has mostly been a function of USD moves and Fed rate expectations, but we also think the rising probability of a bottoming of the European business cycle has supported the common currency.
Advance consumer sentiment in Germany for December improved marginally, partially reversing a decline since July. Confidence remains well above its nadir during the height of the energy shock last year but is still depressed overall. That said, this data follows a slew of improving soft (leading) indicators across Europe, although given the expected weakening of the European labor market and reduced fiscal spending, we’re not expecting a strong economic recovery next year. In fact, markets are pricing in a slightly higher probability that the European Central Bank (ECB) will cut rates before the Fed and by about 100 basis points in total next year, but this will be influenced by incoming data, which makes today’s flash German inflation print of high importance. Another print lower of 3.5% y/y was expected, but as we anticipated, the data came in below expectations at 3.2%.
At $1.10, EUR/USD is trading over 2.5% higher than its 2-year average having climbed almost 5% from its October low. However, it has already slipped from this level and holding above $1.10 may prove difficult as the rates picture remains broadly supportive for the dollar still.
DXY down 4.5% in 8 weeks
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 27-December 1
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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.
