January 11, 2024

“Markets will be looking for further clues on the Federal Reserve’s policy trajectory this afternoon, given the potential for the US CPI release to jolt market pricing for the timing and pace of rate cuts this year. UK GDP tomorrow will also be critical for the pound.”

Sam Cornford – Head of Trading

Main Headlines

A Reuters/Ipsos poll released on Wednesday found that US President Joe Biden and his leading Republican rival, former President Donald Trump, are starting the election year in a dead heat. The poll indicated that 35% of respondents nationwide would vote for Biden, the same percentage as those who would vote for Trump. Almost one-third of respondents expressed no support for either candidate, while 13% said they would not vote, 9% would back another candidate, and 8% were unsure. The findings suggest that many Americans may be unenthusiastic about their choices as the state-by-state nominating contest kicks off with Republican assemblies in Iowa.

On Thursday, Britain’s Treasury department outlined proposals aimed at facilitating the management of the failure of small banks, with the intention of having some costs covered by the industry rather than the taxpayer. The proposed enhancements are designed to provide the Bank of England with greater flexibility to manage the failure of small banks effectively. The Treasury believes that these measures will strengthen the country’s regulatory regime, ensuring sufficient protections for financial stability, customers, and public funds in the event of a bank failure. The consultation follows the sudden collapse of California-based Silicon Valley Bank last year.

GBP

Sterling climbed to an almost two-week high against the dollar overnight as short-term gilt yields rose, having recovered its new year losses in the absence of significant newsflow. BoE governor Bailey left traders unsatisfied when he spoke to the Treasury Select Committee yesterday, steering away from monetary policy clues and doing little to spark the pound into life. A headline domestic input comes early tomorrow morning with the November GDP print – consensus points to a pickup in growth at 0.2% month-on-month although, without a solid December figure next month, this still leaves the UK on track for a possible technical recession in Q4. That said, if the uplift in activity evidenced by recent PMIs filters through, we could see a resilient British economy return to consistent expansion despite elevated rates.

EUR

The euro tracked sterling’s rise in yesterday’s session, supported by some hawkish messaging from ECB policymakers. ECB Vice President de Guindos warned of a renewed pickup in inflation, broadly expected as positive effects from normalising energy prices dissipate and government subsidies expire. Isabel Schnabel similarly poured cold water on rate cut optimism, arguing that rate cut discussions were still premature and that the incoming data would continue to guide policymakers. While the domestic diary leaves only the ECB’s economic bulletin this morning, EUR/USD is potentially set for some sharp moves this afternoon, with US CPI the central focus.

USD

The dollar has eased in the second half of the week as markets gear up for the next big risk event that could shake the dominant narratives driving the FX market. Trading desks are looking for some fresh clues on the pace and timing of the Fed’s rate cutting cycle in the US CPI inflation release this afternoon. The headline year-on-year figure is widely expected to shift up slightly to 3.2% from 3.1% in November, although for many the primary concern is the 0.3% expectation for the monthly rise in underlying core consumer prices. This figure would suggest that price pressures remain strong, despite the 140bps of cuts expected to begin in the near-term. An off consensus read could wobble the foundations of current market pricing of the Fed’s policy path and define a new market direction for the dollar in 2024.

Markets

European stocks are set to continue their rally, following the positive momentum in Asia and on Wall Street. Euro Stoxx 50 futures rose by 0.7%, in line with the gains observed in US contracts. The optimism comes ahead of US inflation data, which is expected to provide insights into the Federal Reserve’s policy trajectory. The positive sentiment extended from Wednesday’s gains in the S&P 500 and Nasdaq 100 indexes.

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

6:00am.: Japan Leading Indicators Index
10:00am.: ECB Economic Bulletin
10:00am.: Italian Industrial Production
2:30pm.: US CPI & Unemployment Claims
8:00pm.: US Federal Budget Balance

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