December 11, 2023

“A blockbuster volatile week awaits the currency markets, as investors attempt to gauge 2024 interest rate paths from five central bank policy decisions, dispersed between an unrelenting barrage of headline macroeconomic data. The Federal Reserve, ECB, and BoE all meet this week, whilst data highlights include US CPI, UK GDP growth, and the flash PMIs.”

Tim Hallinan – Trading Director

Main Headlines

Despite a $3.1 billion federal award, California’s ambitious high-speed rail project, aiming for a travel time of under three hours from San Francisco to the Los Angeles basin, still confronts significant funding challenges. The White House recently announced $8.2 billion in federal funding for rail projects nationwide, including the California initiative touted as the first US high-speed rail project with speeds reaching 220 miles per hour. However, the costs for the California high-speed rail project, initially approved by voters with $10 billion in 2008, have surged, and the necessary funding for the project remains unidentified, leading to multiple delays.

Nestle and Mondelez are experiencing increased confectionery sales in Britain this holiday season. This surge is attributed to cash-strapped shoppers opting for more affordable gifts. Analysts and consumer companies note that, amidst inflation and higher mortgage rates, consumers are choosing lower cost presents this year. Some individuals are turning away from toys and gadgets in favour of chocolate, which, despite price increases over the past year, still represents a relatively inexpensive gift option, according to executives.

GBP

Sterling has regained its footing this morning ahead of a bumper week that includes the Bank of England policy decision on Thursday. A relatively sparse calendar towards the end of last week saw the pound to edge lower amid pared back rate cut expectations for the Federal Reserve and the ECB. There are plenty of domestic volatility triggers this week, however, beginning with the unemployment claimant count and wage growth figures tomorrow morning, which will provide the Bank of England its final clues on whether tight conditions in the labour market remain on a path towards easing. On Wednesday, month-on-month GDP growth is expected to have steered towards contractionary territory in October, despite encouraging PMI data received recently. The Bank of England will almost certainly then hold the day after, alongside some hawkish pushback against market pricing for 2024.

EUR

The euro is trading steadily as traders anticipate Thursday’s ECB decision. Today’s quiet macro diary is very much a calm-before-the-storm situation for markets, who will be gearing up for large moves when a heavy week starts tomorrow. In the eurozone, this will start with the ZEW economic sentiment surveys, which are expected to show weakened optimism this month. Then, for the European Central Bank on Thursday, maintaining a hawkish, euro-supportive tone will be a decidedly challenging task for President Lagarde, given a rapid downturn in inflation and the poor economic growth outlook.

USD

The dollar has stabilised following Friday’s rally sparked by a stronger-than-expected non-farms jobs report and pared back rate cut forecasts. The US economy added a consensus-beating 199k in November, up 33% on October’s dollar-weakening 150k print. Remarkably, the unemployment rate also fell from 3.9% to 3.7%, indicating a persistent underlying strength in the labour market that is yet to truly relent in the face of tightened financial conditions. The probability of a March cut was dialled down to 46%, whilst many strategists have argued that the heavy rate cut expectations priced into markets are premature and likely to be corrected. Tomorrow’s CPI inflation report is the next crucial signal for the dollar’s near-term direction, and is set to heavily influence the Fed’s quarterly dot-plot expectations for future policy when it meets on Wednesday. Last month’s unexpectedly soft inflation figure at 3.2% catalysed a 1.5% downwards swing – economists are looking for 3.1% this time around.

Markets

At the beginning of a busy week filled with data releases and central bank meetings, global equities showed modest changes, testing investor optimism about potential interest rate decreases. European stocks and US futures contracts remained largely unchanged. In Europe, miners experienced the most significant declines, influenced by a drop in iron ore prices following disappointing economic data from China.

Main Economic Data/Central Banks/Government (All Times CET)

01:01am.: UK Rightmove HPI
11:20pm.: Reserve Bank of Australia’s Gov Bullock speaks

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