February 20, 2024

“The currency markets kick back into gear today after an undisturbed sideways trade in the previous session. Policymaker speeches in the UK and CPI in Canada are the highlights today as investors build up to the FOMC minutes and the PMIs in the second half of the week.”

Tim Hallinan – Trading Director

Main Headlines

This morning, China unveiled a record cut in its benchmark mortgage rate, aiming to support the ailing property market and overall economy. The 25-basis point cut to the five-year loan prime rate marked the largest adjustment since the introduction of the reference rate in 2019, surpassing market expectations of 15bps by a substantial margin. The yuan remained largely unchanged after the release.

UK-based Barclays announced a 6% decline in annual profit on Tuesday, meeting expectations as CEO Venkatakrishnan outlined a series of initiatives that include substantial buybacks, restructuring operations, cost reductions, and asset sales. Venkatakrishnan detailed plans to reorganise business divisions, return £10 billion to shareholders from 2024 to 2026, and revamp the payments business, all alongside the release of the bank’s full-year 2023 results.

GBP

Sterling has been somewhat range-bound in the early stages of the week as the economic calendar builds. Its main event today is the Monetary Policy Report hearings before MPs, where Governor Bailey and others will speak for several hours on the policy outlook. This may provide some market-moving clues on the timing of rate cuts this year, although the looming PMIs on Thursday will be in the back of everyone’s minds. The outlook for the pound is starting to brighten in the eyes of speculators, who built their net bullish position on the British currency up to to a near nine-year high last reached in July last week, according to exchange data from the CFTC on Friday. This position will be challenged when the PMIs arrive, which will likely have to reconfirm the UK’s accelerating business activity to keep sterling buoyant.

EUR

Q4 wage growth estimates will guide the euro today, with the importance of the report heightened by emphasis from policymakers on the role of wage dynamics in driving inflation. A reflection of the still hot leading indicators of pay growth in the ECB’s official figures would likely prompt some euro strength, driven by another hawkish repricing that pushes back the commencement of the rate cutting cycle. But investors are somewhat unconvinced about the focus on wage growth and will likely trade tentatively, barring a large upside surprise – the interest rate markets currently price a 45% chance of an April cut, which comes before the more comprehensive, oft-cited wage report later in the month.

USD

The dollar drifted sideways in subdued Presidents’ Day trading yesterday and should wake up tomorrow with the FOMC meeting minutes. With the CB Leading Index hardly a market mover this afternoon, investors will be squarely focused on the policy clues from January’s minutes. While out of date, given the surprises thrown up in this month’s data releases, hints towards the criteria against which policymakers will be judging the timing of rate easing should help to fine-tune market expectations for this year. January CPI inflation data from its northern neighbours in Canada should drum up some volatility in USD/CAD, where the multiple core measures are set to stay relatively stable after an upside surprise in December’s figure dashed hopes of earlier cuts.

Markets

US and European stock futures point to a soft opening this morning, after a fall in Asian equities driven by an underwhelming reaction to China’s record 25bps cut to its key reference mortgage rate. The US markets reopen later today after subdued Presidents’ Day trading.

Main Economic Events (All Times CET)

1:30am: Australian Monetary Policy Meeting Minutes
2:15am: Chinese Loan Prime Rates
11:15am: UK Monetary Policy Report Hearings
2:30pm: Canadian CPI

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