August 22, 2024

“August has been a poor month for the dollar, which has slipped 2.5% as markets have positioned for a Federal Reserve that cuts at a more rapid pace than its peers in Europe. Today is data heavy and focused on the growth outlooks, with the PMIs and US jobless claims the highlights.”

Sam Cornford – Head of Trading

Main Headlines

Canada’s two largest freight rail companies locked out over 9,000 workers early this morning, halting nearly 75% of freight train traffic in the country. Prime Minister Justin Trudeau has pleaded for the companies to negotiate a solution with the unions, with whom they have failed to agree on pay and hours. Moody’s estimated that it could cost the Canadian economy around US$250m a day.

Pay demands have made headlines in the UK too, with the Trades Union Congress expected to call for ‘pay restoration’ from the Labour government after ten years of declining public sector real-terms wages. The expected motion is set to claim that pay has fallen by around 1.5% a year in that time.

GBP

Sterling climbed another half a percent to a fresh 13-month high against a flagging dollar yesterday. This morning’s PMI figures should continue to show some solid economic activity in Q3, which has recently begun to catch a tailwind from a return to expansion in the manufacturing sector. The growth picture has sterling-positive this year – the UK was one of the best performing advanced economies in the first half, although from a low base considering it notched a technical recession in Q4 last year. Q2 GDP growth was double that in the eurozone, and that helps to explain why GBP/EUR is up 1.9% since January. Governor Bailey’s speech tomorrow in Jackson Hole is then this week’s main catalyst for domestic GBP price action.

EUR

The release of a suite of PMI indicators and the Q2 negotiated wage figures are set to test the euro’s upward momentum today. Its one-year high against the dollar is primarily the result of extra cuts being priced in for the Federal Reserve, and arguably in spite of the weaker growth data from the eurozone recently. While few are expecting an imminent recovery, that means that it is not impossible for some upside PMI surprises to launch the euro towards the higher end of the 1.10-1.15 range over the next few months.  In terms of the rates picture, though, the negotiated wage numbers are the most important release today. ECB policymakers had spent a long while emphasising the importance of wage developments in the first half of the year, but then when Q1 wage growth picked up to 4.7%, they released an essay explaining it away based on temporary factors. Nevertheless, it does give a good read on the underling inflationary dynamics in the eurozone and is likely be critical in determining the pace of further cuts.

USD

The dollar took a double blow yesterday from a colossal downward jobs data revision and a particularly dovish set of Fed minutes. The BLS erased 818k from the number of jobs created in the year up to March 2024, and that puts the current deterioration in the labour market within the context of a significantly softer base. That’s the biggest downward revision since 2009. The minutes from the July meeting nudged US yields and the dollar even lower, with the ‘vast majority’ feeling that a September cut would be the most appropriate move if the data continued to soften, and several wanting a rate cut then and there. This bolstered the view that the Federal Reserve is set to cut more quickly than the ECB and the Bank of England, with four cuts now fully priced before the end of the year and a 38% chance that the Fed delivers a catch-up 50bps cut next month. The turnaround in the dollar has been immense – in the first half of this year there were commentators warning that EUR/USD was heading for parity because of the exact opposite view. Today, we get jobless claims and the PMIs this afternoon to warm markets up for tomorrow’s keynote speech from Powell. Hot services PMI figures have been reliable counterevidence to those worried about a US recession recently, and the market has become particularly sensitive to the jobless claims data as the labour market has come into sharper focus.

Markets

Rising rate cut optimism buoyed risk sentiment further yesterday, lifting global equity indexes closer to the record highs reached last month. Zero-yield gold continues to be one of the biggest beneficiaries of falling short-term bond yields, having risen to record levels about $2,500/oz this week. Brent crude, meanwhile, fell 1.5% in its fifth consecutive daily loss yesterday as Middle East geopolitical jitters continued to subside.

Main Economic Events (All Times CET)

10:00am: Eurozone PMIs
10:30am: UK PMIs
2:30pm: US Unemployment Claims
3:45pm: US PMIs
4:00pm: US Existing Home Sales
Jackson Hole Symposium Day 1

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