December 17, 2024

“UK wage growth stickiness is shifting expectations for the Bank of England this morning, which is helping sterling to recover from Friday’s poor GDP report. A critical CPI print comes tomorrow and then the main event arrives on Thursday with the Bank of England decision.”

Sam Cornford – Head of Trading

USD

The dollar is holding strong in the run up to tomorrow’s Federal Reserve decision, supported by a grind upwards in longer term Treasury yields. While Wednesday’s rate cut is locked in, the market is revising its expectations higher for where Fed rates settle, and the US 10-year yield is up nearly 30bps over the last week. Yesterday’s positive PMI surprise (56.6), the Atlanta Fed’s 3.3% growth estimate for Q4, and Trump’s tax cut and deregulatory push are naturally fuelling expectations for more solid growth next year. The dollar index ended relatively flat on the day yesterday, however, as the stronger-than-expected composite PMI index was matched by similar beats in Europe.

Today, USD/CAD has hit another 4.5-year high and is closing in on 1.43 after finance minister Chrystia Freeland resigned amid disputes with Trudeau over the potential response to US tariff policy, adding Canada to the list of developed markets facing political turmoil. AUD/USD continues its freefall, meanwhile, as poor Chinese data spills over to the Aussie. Traders will be focused on a retail sales report today as they look towards tomorrow’s Fed rate announcement.

GBP

The pound has struggled to capitalise on some hot wage growth data this morning. UK ex-bonus wage growth jumped more than expected from 4.8% to 5.2% in the three months to October, driven by rises in the private sector, leading markets to firm up their bets on a slow and cautious Bank of England easing path next year. The swaps market has trimmed around 11bps off the implied volume of cuts to only 62bps by the end of 2025. A buoyant dollar has cancelled out the gains on GBP/USD but GBP/EUR is grinding higher this morning. While unemployment held at 4.3%, the deep-rooted issues with response rates and poor data quality mean that this figure is all but ignored by markets these days. With a rate move now priced at only 2% on Thursday, it will take a big downside surprise on tomorrow morning’s CPI inflation report to make a cut even a remote possibility. The consensus is for an uptick from 2.3% to 2.6%.

EUR

Survey data is in focus for the euro today. The eurozone composite PMI could not lift out of contraction but did beat expectations at 49.5 in December, which at the margin reduces the urgency for the ECB to keep cutting rates. Nevertheless, it would be strange to refer to the report as good news, especially considering that the manufacturing sector held at November’s 11-month low. In Germany, Chancellor Scholz’s no confidence motion passed as expected, opening the door to elections in February. It is the confidence of German investors and businesses that is the subject of the ifo and ZEW surveys this morning, both of which– perhaps unsurprisingly – are expected to worsen.

Markets

Equity performance was mixed yesterday. In the US, rallying megacaps lifted the Nasdaq by almost 1.5% to a fresh record high, while in Europe soft Chinese data drove losses across the board as it weighed on the luxury and energy sectors.

Main Economic Events (All Times CET)

7:00am: UK Wage Growth & Unemployment Rate
10:00am: German ifo Business Climate
11:00am: Eurozone ZEW Economic Sentiment
2:30pm: Canadian CPI
2:30pm: US Retail Sales

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