December 04, 2024

“Increasing political risk and some big data points are fuelling a rise in FX volatility this week. South Korea and France are hitting the headlines today for their politics and the Australian dollar has taken a hit from its weakest quarter since the pandemic. There is plenty of data on offer today and the market is looking ahead to Friday’s US payrolls report.”

Tim Hallinan – Trading Director

USD

This week has been full of drama so far and Deutsche Bank’s FX volatility gauge has risen to levels not seen since April 2023, in anticipation of further turmoil. The shock late-night imposition of martial law in South Korea went down like a lead balloon in Asian markets and the won dropped to a two-year low ahead of an impeachment vote.  In France, meanwhile, a no confidence vote against the government is set for 4:30pm CET this afternoon. The biggest swing this morning has come from Australia, where a GDP miss in Q3 sent the Aussie dollar down by 1.2% at the low.

The US dollar edged slightly lower yesterday, despite a stronger-than-expected rise in October job openings. An uptick in the quits rate to the highest since May also indicated greater confidence in workers being able to move elsewhere. Today there is an ADP jobs report, the ISM services PMI for November, and a speech from Chair Powell this evening. ADP has a poor track record of predicting Friday’s non-farms report but tends to trigger a move nevertheless, while the ISM print tends to be taken quite seriously as a predictor of US growth. A slightly softer 55.7 is the consensus for today.

GBP

The focus for sterling will be on BoE Governor Bailey’s speech at an FT digital conference this morning. A December rate cut is off the table and it is unlikely that he would put it back into play, but he has had a habit of moving the pound with throwaway comments that hint towards faster rate cuts over the medium term, such as his suggestion that cuts could become ‘a bit more aggressive’ a few months ago. The final PMI revisions also come this morning, having slipped into marginal contraction at 49.9 in the first release for November.

EUR

The euro faces a critical no confidence vote in France today. Given that both the far left and the far right have already signalled support for the motion this week, Barnier’s government is very likely to fall today and keep the chaos alive, although President Macron still reckons that it can survive. Either way, one-month implied EUR/USD volatilities are trading only a touch below the levels reached ahead of the US election. Also on the calendar are some final PMI estimates, a PPI inflation print, and a speech by ECB President Lagarde in EU Parliament this afternoon. The market has rolled back bets on a 50bp move in December and now heavily favours a 25bp rate cut – it is unlikely that she moves the dial on this too much at this stage.

Markets

Stock bulls carried on undeterred as US and European equities broadly inched higher yesterday despite the political turmoil in several parts of the world. Oil prices also received a boost from expectations that OPEC+ would extend its output cuts this week, rising 2.7% on the session.

Main Economic Events (All Times CET)

1:30am: Australian GDP
10:00am: BoE Governor speaks
11:00am: Eurozone PPI Inflation
2:15pm: US ADP Non-Farms
4:00pm: US ISM Services PMI
4:30pm: France No Confidence Vote
7:40pm: Fed Chair Powell speaks

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