February 06, 2024

“The non-farms dollar rally has run out of steam at an 11-week peak for now, after pushing sterling and the euro to their lowest levels since mid-December. The key from here is if these pairs can break further out of their ranges – we are looking to a raft of Fed speakers for the next jolt.”

Sam Cornford – Head of Trading

Main Headlines

The European Commission is set to propose on Tuesday that the EU reduces its net greenhouse gas emissions by 90% by 2040. This ambitious target will gauge the political will to continue Europe’s fight against climate change, especially in the lead-up to EU elections. Drafts of the Commission’s recommendation, seen by Reuters, confirm the EU’s endorsement of the 90% target for net greenhouse gas reductions compared to 1990 levels.

On Tuesday, Britain announced plans to invest over £100 million to establish nine new research hubs in artificial intelligence and to provide training for regulators in understanding the technology. “AI is moving fast, but we have shown that humans can move just as fast,” said technology minister Michelle Donelan. “By taking an agile, sector-specific approach, we have begun to grip the risks immediately.”

GBP

The past couple of days have been painful for sterling, having slid 1.9% peak-to-trough against the dollar since the non-farm payrolls release. It has also inched lower by almost half a percent against the euro in the same period, with upbeat data yesterday unable to stem losses despite showing services activity expanding at the fastest pace since May 2023. On the report, fading recession risks and the loosening of financial conditions at the end of the year were said to have boosted spending. BoE Chief Economist Pill said last night that the conversation around rate cuts is transitioning towards when and not if, hinting that it has now effectively become a waiting game for sufficient evidence to appear in the data. Today is particularly quiet on the domestic side for the pound, with only the construction PMI, although it is certainly possible that we see some retracement of the recent downwards move throughout the day.

EUR

The euro has broken out of its range to the downside somewhat, having slowly crept lower for much of this year so far. Investor confidence ticked higher yesterday but the outlook remains soft for the eurozone economy – this was confirmed yesterday by a 48.4 final services PMI print that continues to fluctuate in the zone between stagnation and contraction. While the euro has defended against further losses this morning, markets brushed off a pickup in demand in German with a surprise 8.9% month-on-month increase in factory orders. Later today, consensus points to a 0.9% contraction in eurozone retail sales in December, and the ECB’s consumer inflation expectations survey for December should show some easing.

USD

The dollar has surged to a near three-month peak as traders pare back rate cut expectations and US yields rebound. Yesterday’s price action ultimately continued the momentum of Friday’s rally, as markets awoke to the seemingly unwavering resilience of the US economy and the headroom that this leaves the Fed to hold rates at restrictive levels. The 2-year Treasury yield is up almost 25bps since the non-farm payrolls release – in terms of real short-term borrowing costs, the stellar jobs figure has effectively amounted to a rate hike. As a result, the exuberance that drove capital out of the dollar in the final month and a half of 2023 has been almost fully reversed. A positive beat on the ISM services PMI yesterday at 53.4 – well into expansionary territory – then fuelled the dollar’s bullish trajectory further. AUD/USD is one of the few G10 pairs to exhibit some weakness for the greenback this morning, after the Reserve Bank of Australia held its cash rate at 4.35% but retained its messaging that another hike was still on the table.

Markets

Chinese stocks rallied after a Bloomberg report that financial regulators were meeting President Xi Jinping about the market today, signalling renewed urgency to put a floor on the slumping market. BP shares jumped 5.5% on the news that It would commit to $3.5bn in stock buybacks in the first half of the year, helping the FTSE 100 to inch up by 1% in this morning’s trade.

Main Economic Events (All Times CET)

4:30am: Reserve Bank of Australia Policy Decision
5:30am: Reserve Bank of Australia Press Conference
8:00am: German Factory Orders
10:30am: UK Construction PMI
11:00am: Eurozone Retail Sales
4:00pm: Canadian Ivey PMI
6:00pm: Fed’s Mester speaks
6:45pm: Bank of Canada Gov Macklem speaks

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