February 21, 2024

“The dollar has cooled off slightly as markets await the next directional cues from the data calendar with China the headline focus yesterday. Tomorrow’s PMIs should give FX its next catalyst.”

Tim Hallinan – Trading Director

Main Headlines

Germany’s economic advisers intend to align their forecast for economic growth in 2024 with the federal government’s downward revision, according to adviser Ulrike Malmendier who spoke to Reuters yesterday. The council of advisers to the government had previously estimated growth to reach only 0.7% in 2024 in its November forecast. The next official update is scheduled for mid-May.

Britain posted its highest-ever budget surplus in January, driven by record seasonal tax revenues, according to official figures released on Friday. The Office for National Statistics reported a surplus of £16.7 billion for January, the highest on record but slightly below economists’ expectations of £18.7 billion. Despite this surplus, the broader fiscal outlook remains challenging as Chancellor Jeremy Hunt prepares for the annual budget. Since the start of the financial year in April 2023, public borrowing has reached £96.6 billion, a decrease of £3.1 billion compared to the same period in the previous financial year, the ONS noted.

GBP

Sterling received a lift against a softening dollar yesterday despite some downwards pressure from moderately dovish policymaker comments at the parliament hearings. The fundamental narrative was relatively unchanged, although BoE Governor Bailey captured some attention when he all but endorsed the market-implied rate trajectory, saying that it was not ‘unreasonable’, and that inflation need not be at 2% before the bank can deem it appropriate to cut rates. The tone read as slightly dovish and weighed on sterling modestly, pushing it down slightly against the euro. There are few catalysts in the diary for strong moves today beyond a speech by notorious BoE dove Swati Dhingra, with markets looking ahead to tomorrow’s PMI reading that should validate broad expectations for a continued acceleration in British business activity.

EUR

A strong wage growth figure helped the euro ride some dollar weakness to touch a two-and-a-half-week high yesterday. The quarterly wage growth estimate declined only modestly from 4.7% to 4.5% – topping out is a good sign for the wage-focused rate-setters in Frankfurt, but the still high figure is unlikely to give policymakers enough confidence to cut before the more comprehensive data arrives in April. Consumer confidence data due out this afternoon is the sole data point available to markets today from the bloc, with most looking towards an expected deceleration in economic contraction in tomorrow’s purchasing manager survey results.

USD

The dollar sunk slightly against its major peers yesterday, in parallel with easing global yields and a small boost to growth sentiment out of China. With few data impulses to guide the greenback in the first half of the week, market voices have increasingly been discussing the prospect that last week’s strong CPI print was more a result of seasonal peculiarities rather than an inflationary reignition, and yields have crept lower over the past couple of days. A sizeable cut to China’s 5-year loan prime rate also guided emerging market risk assets higher and the safe-haven dollar lower, although the impact on market sentiment was overall fairly limited, with investors still looking for more substantial fiscal stimulus to revive demand. The Fed’s Bostic speaks again later today, but the headline event is the FOMC meeting minutes from last month’s policy hold. The strong inflation data since has diminished the extent to which markets will likely trade on the report – expect it to revisit the familiar script that more data and patience is needed to confirm that inflation is well on its way to 2%.

Markets

Nvidia’s full year earnings release today is the main event captivating the equity markets. Shares in the US’ third largest company fell over 4% yesterday, dragging down US stock indexes as nerves grew about meeting expectations for a tripling of quarterly revenue to around $20bn. In Europe, European STOXX 600 is up 3% this year as rate cuts come into view and is approaching a record high last reached in January 2022.

Main Economic Events (All Times CET)

2:30am: Australian Wage Price Index
8:00am: UK Public Sector Net Borrowing
12:00pm: UK CBI Industrial Order Expectations
2:00pm: Fed’s Bostic speaks
3:00pm: BoE’s Dhingra speaks
8:00pm: US FOMC Meeting Minutes

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