January 10, 2024

“A speech by BoE Governor Andrew Bailey is the headline event for today – British central bankers have so far pushed back against the significant rate cuts priced in for this year, propping up sterling into the new year. A relatively quiet calendar elsewhere has investors in wait-and-see mode ahead of a crucial US inflation figure tomorrow afternoon.”

Tim Hallinan – Trading Director

Main Headlines

Retailers globally are taking measures to stock up on goods ahead of China’s Lunar New Year holiday, exploring alternative transportation routes by air or rail to avoid relying on the Red Sea. The shift is driven by concerns about potential disruptions to the supply chain due to attacks on vessels in the Red Sea by militants. Major container ship operators such as Maersk and Hapag-Lloyd are rerouting vessels away from the Suez Canal, the shortest route from Asia to Europe. Some retailers are even delaying marketing campaigns until they secure sufficient stocks to prevent potential empty shelves this spring.

Investment in UK start-ups declined to $21.3 billion in 2023, down from $31.3 billion in 2022 and approximately half of the peak fundraising in 2021, according to a report by HSBC Innovation Banking and Dealroom. The report highlights that new British companies experienced record fundraising during the COVID-19 pandemic, with venture capital investment reaching $41 billion in 2021. However, funding slumped in the second half of 2022. This decline in venture capital flows is not unique to the UK, as global venture capital activities have contracted from the highs observed in 2021 and 2022 due to higher interest rates, which increased borrowing costs and diminished investor appetite for risky investments.

GBP

Weighed down by a subdued risk environment amid parallel losses in equities, sterling drifted downwards in a 0.6% range in yesterday’s session. Ahead of Friday’s GDP print, BoE Governor Bailey will provide a fresh impulse for price action in the pound this afternoon in a speech about the Financial Stability Report, as traders look to determine the probability of the May rate cut currently priced into markets. While the Federal Reserve has pivoted away from firm pushback against policy easing, its British counterpart has so far maintained its high-for-long rhetoric – Bailey’s policy clues are likely to reflect this stance again and may nudge markets to revise their stretched bets for five rate cuts this year.

EUR

The euro has steadied this morning after a mixed set of data saw it edge lower throughout yesterday. While German industrial output data disappointed, lingering inflationary pressures emerged as eurozone unemployment unexpectedly fell back to its historic low of 6.4%, previously reached in mid-2023. Though surprising, however, it is unlikely to upend the economic outlook for the ECB. Today’s macroeconomic calendar is relatively sparse, with only a positive French industrial production figure earlier this morning and an upbeat Italian retail sales print – more attention is likely to be paid to speeches by prominent ECB officials de Guindos and Schnabel this afternoon. The latter is a notorious hawk and may give a voice to policymaker pushback to the ~140bps in cuts expected this year.

USD

Directional swings in the dollar have been relatively dulled this week, with markets typically tentative ahead of the anticipated volatility associated with the CPI release tomorrow. US economic resilience seems to be making a comeback following the rate-cut euphoria of December, as small business sentiment rose for the first time in five months yesterday, alongside a similar jump in consumer economic optimism. The diary is limited to a speech by the Fed’s Williams this evening, with markets keen to gauge the likelihood of the March cut, which is currently assessed at 64%.

Markets

Japanese stocks reached fresh three-decade highs, defying declines seen in other equity markets, as broader sentiment remained subdued ahead of a crucial US inflation report. The Topix index closed at its highest level since March 1990, benefiting from a weaker yen and declining bond yields. In the crypto space, bitcoin surged yesterday after an X post by the SEC appeared to announce the approval of a spot bitcoin ETF, before quickly being taken down as the SEC that its account was compromised.

Main Economic Data/Central Banks/Government (All Times CET)

1:30am.: Australian CPI
8:45am.: French Industrial Production
10:00am.: Italian Retail Sales
3:15pm.: BoE Governor Bailey speaks
4:30pm.: US Crude Oil Inventories
9:15pm.: Fed’s William speaks

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