December 18, 2023

“Last week’s jam-packed calendar weakened the US dollar as the Federal Reserve began its pivot to discussions on rate cuts, in contrast to the resolutely hawkish Bank of England and ECB that stuck to the higher-for-longer script. Inflation expectations in the US and UK will be tested this week, with UK CPI and US core PCE inflation the headline releases.”

Sam Cornford – Head of Trading

Main Headlines

Lael Brainard, the head of the White House’s National Economic Council and a top economic advisor to US President Joe Biden, stated on Friday that recent data indicates a larger “width of the runway for a soft landing.” Speaking to reporters in Washington, she expressed optimism, noting “we’ve seen quite positive indicators that inflation really has come down.” In economic terms, a ‘soft landing’ refers to policymakers successfully slowing an economy to bring inflation under control without causing a recession.

On Monday, the UK announced plans to implement a new import carbon pricing mechanism by 2027. Under this system, goods imported from countries with lower or no carbon prices will be subject to a levy as part of the country’s efforts to decarbonise. This mechanism, known as the carbon border adjustment mechanism (CBAM), will specifically apply to carbon-intensive products in sectors such as iron, steel, aluminium, fertiliser, hydrogen, ceramics, glass, and cement.

GBP

Sterling has edged up against the dollar this morning after falling from a four-month high last Friday. The purchasing manager surveys continued to signal improving growth conditions in the UK services sector this month, despite a deepening contraction in manufacturing activity. The composite PMI figure printed at an improved 51.7, well clear of the euro area figure and once again higher than in the US, suggesting that GDP growth data should improve markedly in the coming months. This positive news for GBP/USD was ultimately dampened, however, by hawkish pushback from the Fed’s Williams on Friday afternoon. Markets will hope for further clues on the timing of rate easing when the BoE’s Ben Broadbent speaks this morning, although Wednesday’s CPI print will be the headline event for the pound this week.

EUR

The euro exited a whirlwind week 1.3% stronger against the dollar and with marginal gains against sterling amid hawkish pushback from the ECB. This is despite the contraction in eurozone business activity deepening further in December and lagging significantly behind the UK and US, according to last Friday’s PMIs. According to a Reuters report, however, this is unlikely to prompt policymakers to cut rates in the near-term, who expect inflation to rebound and have argued that the bank will not change its messaging before March, leaving a cut before the June meeting difficult. Today’s macroeconomic calendar is relatively sparse, with the German ifo business climate survey index the only notable release alongside several ECB speakers.

USD

The dollar index has fallen slightly this morning after hawkish language from the Fed’s Williams launched a rebound on Friday afternoon. The dollar collapsed around 2% in the immediate aftermath of the major central bank decisions last week, after the Fed pivoted dovish and pencilled in faster and stronger rate cuts in 2024 than were previously expected. Market pricing currently forecasts around twice as many cuts as the Fed, however, and New York Fed President Williams was keen to dampen the rate cut euphoria, arguing that it was premature to discuss policy easing. The Core PCE Price Index is this week’s crucial market event on Friday and data releases are somewhat subdued until the latter half of the week. On currency investors’ immediate radar is the Bank of Japan’s policy decision tomorrow, where officials may signal the circumstances in which they will exit the negative interest rate policy that has severely dampened the yen this year.

Markets

European stocks fell after a lacklustre session in Asia, influenced by Federal Reserve officials pushing back against expectations of substantial interest rate cuts in the coming year. The Stoxx Europe 600 index declined by 0.4%, while US stock futures showed a modest increase.

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

9:00 a.m.: Spain 3Q Labour Costs
10:00 a.m.: Germany Dec. Ifo Business Climate, Expectations
11:30 a.m.: BOE’s Broadbent speaks
11:45 a.m.: ECB’s Vujcic speaks
1:00 p.m.: ECB’s Wunsch speaks
2:30 p.m.: ECB’s Schnabel chairs a panel
4:00 p.m.: ECB’s Lane chairs a panel
ECB Biennial Conference
BOJ starts two-day policy meeting

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