Written by Convera’s Market Insights team
Cautious trading before US inflation
Boris Kovacevic – Global Macro Strategist
The US dollar came into the week on slightly stronger footing but has already lost the minor gains made on Monday in today’s early European trading. Without any economic data points to move markets, investors have scaled back their positioning just before the US inflation report later today and important central bank decisions on Wednesday and Thursday. DXY (103.80) is now trading near its 2023 average (103.50) and the Greenbacks fate will continue to be dependent on both the soft landing scenario being kept alive and the Fed not cutting interest rates too aggressively next year.
Consumer prices due today should confirm the fall of US inflation from 3.2% in October to 3.1% in November. While the pace of the disinflation is clearly slowing and has slightly reversed in recent months, as the cycle low had been reached in June at 3%, it is important for the Federal Reserve to continue seeing progress on the inflation front. Core inflation is expected to remain unchanged at a two-year low of 4%. Inflation excluding food, energy and shelter had already fallen back to the Fed’s 2% target in October and will allow the central bank to continue remaining on hold to evaluate the impact of higher interest rates on the economy.
The US 10-year government bond pushed lower from its labor market report induced high on Monday at 4.77% to trading just below 4.69%. The Nasdaq pushed higher as well and is now only 3% away from its all-time high after having risen for six consecutive weeks. It is interesting to note that the tech index recorded a positive day without the help of the Magnificent seven, with single member of the group falling on the day. This is the first time this has happened since 2012.
UK wage growth is cooling
Boris Kovacevic – Global Macro Strategist
The UK labor market is slowly starting to cool, cementing the idea of the Bank of England staying on the sidelines on Thursday. Most importantly, todays ONS data release showed British wages excluding bonuses rose by 7.3% in the three months leading up to the end of October, compared with the same period last year. Wage growth disappointed economists expectations for a 7.4% increase and is now 0.6% below its multi-decade high reached in August.
The unemployment rate, using the new adjusted experimental method, remained unchanged at 4.2% for the fifth consecutive months. However, claimant count change increase for the third month in a row to 16 thousand in November, setting a new five month high. Around half of UK industries are now experiencing job cuts, based on the data from the ONS on the number of people receiving paid renumeration.
The pound dropped followed the release of the labor market data but recouped all its immediate losses in a matter of minutes. Markets have already priced in the BoE pause on Thursday and are looking ahead to the next meetings in Q1. Since today’s report does not give us any indication of what policy makers will do early next year, today’s data will most likely be overshadowed by other events. However, a string of such weak labor market reports could have investors question if the BoE would really be the most hawkish central bank in 2024, as is currently priced in. Especially given the weakening of alternative wage and labor market data as of late. GBP/USD at $1.2580 is trading slightly above its 2023 average of $1.2420.
Investors cautious ahead of ZEW
Ruta Prieskienyte – FX Strategist
Yesterday’s lack of data releases saw the markets move sideways with little to take away from the muted price action. EUR/USD traded in a tight $1.0740 – $1.0778 range and ended the day flat. Germany’s DAX 40 steadied near the all-time highs as investors paused, staying cautious ahead of the critical first-tier events like the US core inflation print later today and a number of central bank decisions due this week.
A recent Bloomberg survey revealed that the Eurozone is expected to suffer its first recession since the pandemic, in line with our team’s consensus. The weakness ought to be led by Germany as the Europe’s largest economy struggles to emerge from its manufacturing downturn while battling a fiscal budget crisis and weak global demand. The survey contrasts with the European Commission forecasts from earlier last month, which foresees the block returning to growth in Q4. Meanwhile, concerns reemerged that China’s economy is not recovering. China’s consumer prices fell at the fastest rate since November 2020, indicating mounting deflationary pressures. A second consecutive monthly deflation print adds to a recent mixed collection of trade data and manufacturing surveys and will be sure to raise alarm bells for the policymakers. A weak core CPI rate is a stark warning about persistently sluggish demand as Chinese consumers cut down on spending given uncertainties surrounding domestic economic recovery. Markets are awaiting more government stimulus at the annual agenda-setting “Central Economic Work Conference” later this month.
Looking ahead, investors will be keeping a close eye on the ZEW Economic sentiment index due shortly this morning, expecting a third monthly rebound in investor sentiment across the Eurozone and a second positive reading for Germany. Such confirmation would be euro positive and could uplift EUR/USD towards the $1.08 threshold just as the RSI technical indicator warns the pair is approaching an oversold territory. Ultimately, the direction of EUR/USD will be determined by the US core CPI print due later this afternoon.
DXY strengthens, US 2-year yields up ahead of core CPI print
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 04 December
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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.
