February 07, 2024

“The dollar maintained much of its gains but came under some pressure yesterday from a retracement in a quiet day for the FX markets. Headline data is sparse today ahead of a bumper calendar next week, so investors will get their cues from central bankers this afternoon.”

Tim Hallinan – Trading Director

Main Headlines

Dutch government formation talks faced disruption on Tuesday when the centrist party NSC unexpectedly withdrew, adding complexity to far-right politician Geert Wilders’ efforts to build a coalition. NSC, with 20 seats, was considered a crucial partner for forming a majority coalition in the Netherlands’ 150-seat lower legislative body after the Nov. 22 election won by Wilders’ nationalist Freedom Party (PVV).

British living standards are projected to increase this year, but it may take until 2027 for poorer households to regain their pre-pandemic spending power, according to a report by the National Institute of Economic and Social Research (NIESR). The think tank emphasised the importance of the next government focusing on accelerating economic growth rather than offering tax cuts before the anticipated 2024 election, advocating for investment to stimulate the economy.

GBP

Despite a quiet day, sterling price action was positive, retracing a portion of its US jobs-induced losses against the dollar and recovering a downwards move against the euro earlier in the week. This mostly reflected a correction to some overstretched weakness, although a couple of positive data points have undoubtedly helped. PMI data pointed to a decelerating contraction in the construction sector, while the Halifax HPI this morning showed that house prices rose for the fourth month in a row as loosened financial conditions encourage a modest revival in the property market. Swati Dhingra – the only BoE policymaker to vote for a cut last week – gave an interesting interview yesterday explaining her stance, where she warned of the ‘downside risks’ to the economy if rates cuts are delayed, given that the buffer of pandemic savings has faded. Today, a speech by Deputy Governor Breeden this morning is the next impulse for the pound, as we look to see how much further it can lift from its lows.

EUR

The euro gained modestly against the dollar but fell broadly in the crosses yesterday. Eurozone retail sales contracted by more than expected in December at -1.1% in data released yesterday that merely confirmed the bleak state of its economy. The bad news continued to roll in this morning, too, with German industrial production shrinking for the eighth month in a row. While the ECB’s de Cos expressed confidence yesterday that the next policy move for the ECB will be a rate cut, Vujcic struck a more hawkish tone, arguing that the bank would better maintain its credibility holding off until inflation is decisively under control. The latter’s rhetoric drew support from the ECB’s inflation expectations survey, with the 1-year measure holding at 3.2%.

USD

The dollar ended yesterday in the red against most of the G10 complex last night as its slightly overstretched rally came under some corrective pressure. Fed policymakers Mester and Kashkari mirrored the overall hawkish picture painted by the recent data, acknowledging the progress on inflation but unwilling to greenlight rate cuts until the evidence is more compelling. The market has now zeroed in on May for the first cut with a 65% probability, having recalibrated their expectations on a robust US economy and policymaker pushback. More speakers are the highlight of today’s diary, with Kugler and Barkin both set to speak later this afternoon.

Markets

Asian stocks retreated from session highs as investors were left in suspense over China’s efforts to prop up the domestic market. US and European equities held broadly steady yesterday as market volatility tailed off following the sharp moves in reaction to the non-farm payrolls report.

Main Economic Events (All Times CET)

7:45am: Swiss Unemployment Rate
9:00am: Swiss FX Reserves
9:40am: BoE’s Breeden speaks
3:30pm: National Bank of Poland Policy Decision
5:00pm: Fed’s Kugler speaks
6:30pm: Fed’s Barkin speaks

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