February 23, 2024

“A boom in risk appetite buoyed risk-sensitive currencies yesterday, putting a firm lid on the dollar’s string of bullish drivers. A strong US focus awaits next week, with critical GDP and core PCE data among the data releases.”

Tim Hallinan – Trading Director

Main Headlines

On Thursday, a spacecraft developed and operated by Texas-based company Intuitive Machines successfully landed near the moon’s south pole, marking the first US touchdown on the lunar surface in over fifty years and the inaugural landing accomplished by the private sector. NASA, which had several research instruments aboard the spacecraft, celebrated the landing as a significant milestone in its objective to deploy a fleet of commercially operated spacecraft for scientific exploration missions to the moon, paving the way for the anticipated return of astronauts later this decade.

Starting from April, the majority of British household energy bills are set to fall as regulator Ofgem reduces its domestic price cap by 12.3%, marking its lowest level in over two years. This cut, influenced by a decline in wholesale energy prices, aims to alleviate the financial burden on households grappling with a cost-of-living crisis, while also contributing to inflation mitigation efforts.

GBP

Sterling ground out some gains in choppy trading yesterday, bouncing off key levels in a near 1% range. Global equity market optimism and some strong business activity triggered a risk on move that propelled the pound by 0.5%. It then pared much of these gains however, as the details of the PMI report exposed some deeper issues and US resilience was reconfirmed in the afternoon. The composite index surged at the fastest pace since May, jumping from 52.9 to 53.3 as consumer demand inched higher on rate cut optimism and expectations for a growth uptick. The 0.2-0.3% implied GDP growth rate in Q1 is certainly positive, but the report did note some concerns. Key among them was the fact that the upturn is underpinned by a revival in financial services activity and driven by expectations for rate cuts, something that could rapidly unravel if the disinflation path begins to hit some bumps in the road. Today, the pound was undeterred by an unexpected decline in the GfK consumer confidence measure this morning and, given a lack of data, will likely be guided by equities and risk conditions.

EUR

The eurozone’s mixed PMI releases left the euro trading flat against the dollar by the close of business yesterday. Traders pared rate cut expectations for this year to below 100bps after the services measure returned to the critical 50.0 expansionary mark for the first time since July, bolstering hopes that peak economic gloom is behind us. But serious concerns remain in the manufacturing sector, with Germany again a strong drag on the bloc’s activity, printing well below expectations at 42.3. The overall picture, however, should provide more than enough room to allow the ECB to demonstrate patience as it assesses the incoming data, and it certainly will not force stimulative cuts in the near term. Today, the German ifo business climate survey should improve modestly this morning but remain weak, and comments from Schnabel and Nagel will capture investors’ attention.

USD

A reconfirmation of US resilience and some hawkish policymaker rhetoric helped the dollar to rebound through the second half of yesterday’s session, having dipped on a surge in investor risk appetite earlier in the day. If not for the AI-related boom in risk-sensitive assets, the greenback would likely have had a solid day – the PMIs fell on expectations but remained strong, jobless claims dipped to a five-week low, and home sales swelled for the third consecutive month. Comments from Fed Governor Waller then piled on the downwards pressure on rate cut bets, all but ruling out a May cut as he argued that a few more months of inflation data was required to gain robust confidence that 2% was in sight. Easing expectations for this year have fallen to 78bps from 150bps at the start of January, having now come full circle to converge with the Fed’s December dot plot that spurred on the initial rate cut frenzy. The calendar is barren today, but we look to a huge set of data next week that includes GDP and core PCE.

Markets

Equity indexes across the globe ballooned to all-time highs yesterday, thrust higher by AI optimism and a 16.4% surge in Nvidia stock that sent ripples across the markets. The S&P 500 neared 5,100, the European Stoxx 600 and Japanese Nikkei 225 closed at fresh record highs, and Chinese stocks extended their 10% bounce from five-year lows touched only a few weeks ago.

Main Economic Events (All Times CET)

8:00am: German Final GDP
9:00am: BoE’s Greene speaks
10:00am: German ifo Business Climate
10:20am: ECB’s Schnabel speaks

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