December 14, 2023

“The dollar plunged yesterday to a four-month low after the Federal Reserve pivoted its messaging towards a firmly dovish outlook. Chair Powell all but declared victory over inflation and signalled quicker rate cuts next year. Markets will have no time to relax today, however, with four major central bank decisions set to cause havoc in the currency markets.”

Sam Cornford – Head of Trading

Main Headlines

On Wednesday, the US House of Representatives voted to formally authorise its ongoing impeachment inquiry into President Joe Biden. Republicans, despite not yet finding evidence of wrongdoing, united behind the effort. The chamber, along party lines, voted 221-212 to approve the probe. The investigation is due to examine whether Biden improperly benefited from his son Hunter Biden’s foreign business dealings, coming after Hunter Biden declined an invitation to testify behind closed doors.

The UK property market witnessed some recovery in November as a surge in mortgage rates eased, according to a survey by the Royal Institution of Chartered Surveyors (RICS). The measure of new buyer enquiries rose to a net balance of -14, an improvement from the upwardly revised -25 in October. This November reading represents the least weakness since +1 in April of the previous year. Despite these positive signals, surveyors remain cautious due to concerns about the downbeat outlook for Britain’s economy and the likelihood of elevated borrowing costs persisting for some time.

GBP

Sterling rallied 1.2% to a one-week high at its peak against the dollar last night, despite falling against the euro across the day due to weak growth data. The pound rode a wave of dollar weakness following the Federal Reserve decision yesterday, ahead of the Bank of England’s monetary policy summary this afternoon. Rate cut expectations for next year have steadily crept up as a result of a series of softening data this week, including cooling wage growth and slowing economic activity, which have suggested that policymakers may have to lower rates earlier than expected. Markets currently expect 100bps of cuts next year, beginning in June. Whilst other banks are pivoting towards this view, the BoE is likely stick to its hawkish pushback against such pricing when it holds rates later today.

EUR

The euro recorded a similar surge yesterday evening as the ECB prepares a tight balancing act in its monetary policy decision this afternoon. Consensus expects officials to dial down growth and inflation forecasts whilst also attempting to contain speculative pricing for cuts for next year. With inflation falling more rapidly than previously expected and many wondering if they have already overtightened, the bank must acknowledge that the disinflation battle is almost won to retain credibility. But they are unlikely to declare victory or to formally begin discussions around easing policy, given the risk that markets run away with jubilance and send eurozone yields tumbling. Elsewhere in Europe, the Swiss franc fell as the SNB held its policy rate at 1.75% and the Norges Bank are expected to hold their key rate at 4.25%.

USD

The dollar index plummeted to a fresh four-month low overnight after a decisively dovish pivot in the Federal Reserve’s economic projections that signalled earlier and faster rate cuts next year. The target Federal Funds Rate remains in the 5.25-5.50% range, but the median forecast for the end of 2024 now sees 75bps of cuts from current levels, with the final hike pencilled in last quarter’s projections now erased. Chair Powell all but endorsed the market’s 2024 rate cut narrative as he stated that further hikes were ‘not the base case anymore’, having already done enough to see growth cool, labour market imbalances moderate, and inflation come down rapidly. The implicit validation of the recent move in the 10-year Treasury yield from 5% to 4% in a matter of weeks greenlit a further slide below the 4% mark, whilst the rate-sensitive 2-year yield plunged 30bps. Investors have little time to breathe following the move, however, with key retail sales and unemployment claims data due this afternoon.

Markets

Stocks and bonds rallied after the Federal Reserve indicated the possibility of interest-rate cuts next year. This announcement reignited a bullish sentiment across markets, particularly as inflation showed signs of easing. A global gauge of stocks posted gains for a sixth consecutive session, with the S&P 500 finishing Wednesday within 2% of its record high. In Asian futures trading on Thursday, the positive momentum continued, leading to record highs for Apple Inc and the Dow Jones Industrial Average.

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

1:30am.: Australia Employment Change
9:30am.: Swiss National Bank Rate decision
1.00pm.: Bank of England Rate Decision
2:15pm.: ECB Rate Decision
2:30pm.: US Retail Sales & Jobless Claims
2:45pm.: ECB Press Conference

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