August 30, 2024

“The dollar has staged a recovery this week, but it has not been enough to save it from what is set to be the weakest month of 2024 so far. A rapid increase in expectations for Federal Reserve easing is the main story, and core PCE could lead to a readjustment this afternoon.”

Sam Cornford – Head of Trading

GBP

Sterling has shown some good resilience to the rise in the broad dollar this week. It hit a one-month top against the euro yesterday and has only slipped around 0.3% against the greenback, in what has largely been a week of consolidation for the pound after the Jackson Hole speeches last Friday. Mortgage approvals data is expected to hold at around 60k this morning, but it’s inflation data from the eurozone and the US that will really count for FX today.

EUR

Sharper-than-expected drops in national inflation figures reaffirmed bets on a September rate cut from the ECB yesterday and took the euro a notch lower. It is getting some very modest support this morning from an Olympics-related upside surprise from France, at 2.2%, and a hawkish speech from the ECB’s Schnabel, which called for the Governing Council to ‘proceed gradually and cautiously’ and to stick to a data-dependent strategy. Yesterday’s prints will likely have markets positioned for an even weaker headline eurozone CPI figure than the 2.2% survey median this morning, but it will be the core and services prints that will be most consequential for any repricing of the rates curve. Part of Schnabel’s reasoning for her cautious stance comes from the fact that services price growth has been flat for some time now, although falling wage growth and subdued economic activity should still see these brought down in the medium term.

USD

August has been a miserable month for the dollar index. An upward readjustment has trimmed its losses to just 2.6% this week, but that is still enough to be its worst monthly performance since November 2023. The data yesterday lent some support to the soft-landing narrative – at least as of Q2 – with second-quarter GDP growth revised up from 2.8% to 3.0% and the quarterly core PCE figure revised down to 2.8% (both annualised figures). That’s some evidence that the ‘no recession’ camp can claim, although it is important to note that much of the labour market weakness and spotty ISM PMI indicators spooking the Fed have come since Q2 ended two months ago. With savings depleting, consumer sentiment wobbling, and unemployment rising, it’s the state of the US economy in a year’s time that is relevant to the Fed, given that any policy action will take at least that long to properly filter through to the real economy. Today’s core personal consumption expenditures (PCE) inflation figure – the gauge that the Fed targets – is expected at 0.2% m/m once again and should reconfirm the case for a first rate cut at next month’s meeting. A significant downside surprise is relatively rare given the clues already provided in the PPI and CPI prints earlier in the month, but investors will be keeping their eyes in any strong clues on the size of the first move.

Markets

Equities shrugged off analysts’ disappointment with Nvidia’s Q3 forecasts, and upward revisions to US Q2 growth data kept the S&P 500 flat overall despite a 6.4% drop in the chipmaker’s stock by the close. The European STOXX 600 and Japan’s Nikkei both surged around 0.8%.

Main Economic Events (All Times CET)

8:45am: French Flash CPI
10:30am: UK Mortgage Approvals
11:00am: Eurozone Flash CPI
2:30pm: Canadian GDP
2:30pm: US Core PCE Inflation

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