December 11, 2024

“We have our eyes on two key events today: US CPI and a Bank of Canada decision. Inflation is expected to be relatively hawkish, but markets remain quite comfortable with pricing another Federal Reserve rate cut next week. In Canada, they are just as certain about another 50bp move.”

Tim Hallinan – Trading Director

USD

The dollar has the wind in its sails this morning. There are a couple of reasons why, not least the 3-year high in NFIB small business optimism yesterday and some nervousness around the incoming CPI print, which could yet impact pricing for a rate cut next week. The biggest story in FX this morning is a Reuters piece in which sources have touted the possibility that the People’s Bank of China intentionally weakens the yuan next year on top of the already announced monetary loosening, all in an effort to offset the impact of US tariffs and to support growth. The resulting strength in USD/CNH looks to have spilled over into the broad dollar to some extent, weighing on the likes of EUR/USD.

Consensus expects a rise in the inflation figure to 2.7% today and for core CPI to hold at 3.3%. That broadly supports the narrative that we have been seeing something of a stall in progress over the past few months. Nevertheless, a rate cut is baked in to swaps pricing at an 86% probability, ahead of a widely expected pause in January. An upside surprise on the 0.3% month-on-month figure – ~3.7% on an annualised basis – could threaten this certainty, however. Meanwhile, the Bank of Canada are widely expected to cut by 50bps this afternoon, and the Canadian dollar is looking vulnerable at a 4.5-year low.

GBP

A quiet UK data calendar continues to be the perfect environment to allow sterling to eke out gains against the euro. It hit a 2.5-year high on Tuesday and is touching fresh peaks again this morning after Rachel Reeves drew attention to negotiations in 2025 for a closer UK-EU trading relationship. The 5% rally in GBP/EUR this year mainly boils down to a 70bps widening in the pound’s two-year yield advantage, and behind that are some much more stable politics in the UK, stronger growth momentum, and a deeper structural element to UK inflation. Looking ahead, sterling goes into 2025 in a much stronger position than the euro, thanks to some frontloaded fiscal stimulus from the budget, a slower cutting path, and a smaller exposure to the impact of US trade tariffs. Friday’s GDP report may yet spoil the party, but the focus before then is on the ECB.

EUR

The euro is coming under some pressure this morning and has spent some time below the 1.05 handle for the first time this week as the broad dollar has gained. There has been a distinct lack of eurozone catalysts over the past few days, and EUR/USD is in the hands of the US inflation data this afternoon. Focus can then shift onto the ECB tomorrow, where a 25bp rate cut is near certain but we should get some clues on the path of easing next year in the policy statement and Lagarde’s press conference.

Markets

Stocks fell into the red across the board yesterday as China optimism waned and traders took some risk off the table ahead of US inflation and the ECB decision. France was the worst hit, with the CAC 40 slipping by 1.1%, while Germany’s DAX held almost flat, keeping its two-week gain at above 5%.

Main Economic Events (All Times CET)

2:30pm: US CPI Inflation
3:45pm: Bank of Canada Rate Decision

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