January 05, 2024

“Traders’ continual reassessment of the pace and timing of rate cuts remains the dominant force in the currency markets, as an unwinding of overly optimistic expectations propel the dollar towards its best week since July. Non-farm payrolls this afternoon are the headline data today and will set the tone into next week.”

Sam Cornford – Head of Trading

Main Headlines

Denmark’s Maersk announced on Thursday that it has redirected four out of five container vessels that were stuck in the Red Sea back towards the Suez Canal. The decision to reroute the vessels around Africa was made to avoid the risk of attacks, particularly in light of recent attacks by Houthi militants based in Yemen in the southern Red Sea. One of Maersk’s ships was targeted in the recent attacks. The disruptions caused by these incidents have impacted global trade and led to concerns about potential inflation, as shipping rates have surged. While the United States launched a multinational operation on December 19 to secure commerce in the Red Sea, several shipping companies and cargo owners continue to divert vessels around Africa.

On Thursday, Prime Minister Rishi Sunak signalled the beginning of the countdown to Britain’s next election, stating that his “working assumption” was that it would occur in the second half of the year. This announcement all but ruled out the possibility of an earlier election, which opposition parties had called for. Sunak, recognising the Conservative Party’s significant lag behind Labour in the polls, swiftly addressed the issue by emphasising his focus on pending tasks, including tax cuts—a key demand within his party. Sunak stated during a visit to central England, “My working assumption is we will have a general election in the second half of this year because, in the meantime, I have lots I want to get on with.”

GBP

Positive surprises in growth and lending data sparked a moderate rebound in sterling yesterday. Private sector services activity figures for December moved further into expansionary territory – and well above the US – in their final estimate, as the resilience of the UK economy continues its impressive recovery despite elevated interest rates. Investors will look for these emerging signals in the concrete GDP growth data for November next Friday. Mortgage approvals meanwhile jumped to their highest in five months amid easing financial conditions and mortgage rates. A light calendar today puts the spotlight on critical US labour market data due this afternoon, with only the construction PMI this morning that is expected to improve slightly but still remain weighed down by elevated rates.

EUR

The euro emerged slightly stronger against the dollar yesterday after some choppy trading, but in today’s session the common currency is again approaching its new year trough from earlier on in the week. French and German CPI figures printed broadly as expected yesterday and, whilst year-on-year price growth spiked because of energy price effects in the prior year, the monthly figures were in line with the cooling trend, and therefore did little to materially alter the outlook for inflation and the ECB easing cycle this year. The consolidated euro area figure is similarly due to tick up from 2.4% to 3.0% this morning. Another downside surprise as in previous months would likely see markets return to a more dovish view of the ECB’s rate easing cycle this year and put pressure on the euro.

USD

The US dollar is on track for its best weekly performance since July, driven by scaled back expectations for Federal Reserve rate cuts following the euphoric rally in bonds and equities in late-2023. It received a further boost yesterday afternoon by surprisingly resilient labour market data, as ADP’s estimate of payroll growth rose dramatically to 164,000 and initial jobless claims fell more than expected to 202,000. The strong data saw traders reassess again the overstretched rate cut pricing from December, driving the 10-year Treasury yield back above the psychologically significant 4% threshold. The macroeconomic calendar reaches a peak today with a string of critical jobs data that includes non-farm payrolls, wage growth, and unemployment, which should set the tone for financial markets as we head into the weekend. Markets will be keen to see some confirmation of this renewed resilience, although consensus currently points to 168,000 new jobs created in December, down from 199,000 in the previous month, despite whispers of a stronger figure. The ISM services PMI and a speech by the Fed’s Barkin will then add fresh market impulses later in the day.

Markets

European equity futures experienced a decline on Friday, while stocks across Asia showed mixed results. The Euro Stoxx 50 contract fell by 0.6%, whereas its US counterparts remained relatively unchanged. Japanese stocks saw gains, aided by a weak yen, while equities in South Korea, Australia, mainland China, and Hong Kong recorded declines.

Main Economic Events (All Times CET)

8:00am.: German Retail Sales
8:00am.: UK Halifax HPI
10:30am.: UK Construction PMI
11:00am.: Eurozone CPI Flash
2:30pm.: US Non-Farm Payrolls, Wage Growth, and Unemployment Rate
2:30pm.: Canadian Employment Change
4:00pm.: US ISM Services PMI and Factory Orders
7:30pm.: Fed’s Barkin speaks

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