March 04, 2024

“The markets have opened this week with a positive tone as investors look to headline US jobs data and the ECB’s policy decision to break the dollar out of its current ranges. For sterling, the spring budget update is set to dominate chatter about the UK economy.”

Tim Hallinan – Trading Director

Main Headlines

Presidential candidate Nikki Haley secured her first victory in the Republican primary in Washington, DC, on Sunday, according to Edison Research. Winning 62.9% of the vote, Haley’s victory, though largely symbolic, marks an important milestone for the former US ambassador to the United Nations. Her campaign said that she is now the first woman to win a Republican US primary.

British Chancellor Jeremy Hunt moved to temper expectations of significant pre-election tax cuts in this week’s budget, citing a deteriorating economic outlook. Speaking to the Sunday Telegraph, Hunt acknowledged that forecasts shaping the budget had turned unfavourable, hinting at potential support measures for voters but downplaying the possibility of substantial giveaways amidst calls from within his Conservative Party for such initiatives.

GBP

A risk on mood in the markets has lifted sterling this morning, ahead of the UK’s spring budget update on Wednesday. The only point of note on Friday was a speech by BoE Chief Economist Pill, who tempered expectations for the first rate cut, saying it was ‘some way off’. The data calendar for this week is similarly sparse beyond a final services PMI estimate tomorrow and a construction PMI on Wednesday, narrowing the domestic focus to Wednesday’s fiscal event. All told, the previous few budget updates have done little to materially shift the FX markets, but the proximity to the election should amplify the impact of the decision on the political outlook. Moves are likely to be tactical and targeted, given that economic projections put fiscal headroom is at a much lower level than Hunt would have liked, and the lessons learned by the gilt market turmoil from Truss’ mini-budget disaster. Investors will be looking for meaningful but measured and funded tax cuts to trade the pound higher.

EUR

The euro has inched higher this morning as eyes turn to the ECB decision on Thursday. Fresh macroeconomic projections and officials’ language will hold the key to the euro’s direction this week – policymakers are likely to retain their hawkish, patient stance, but will struggle to ignore the solid pace of disinflation in the recent CPI reports and the expected downwards revision to its future trajectory. The stage could well start to begin to be set for a June cut. This morning, the Sentix investor confidence index should improve for the fifth straight month. In Switzerland, a smaller-than-expected fall in headline inflation from 1.3% to 1.2% handed the franc a modest boost, although the outlook in terms of deflationary risks is rather bleak.

USD

Jobs week is set to jolt the dollar over the coming days. Markets get a break today but the ISM services PMI, the JOLTS survey, ADP non-farms, a Powell testimony, and Friday’s blockbuster jobs report will be the primary sources of volatility across the FX markets this week. Last month’s blowout 353K payrolls figure set the tone for a spike in inflation and a rally in rates across developed markets – this month’s still healthy 190K consensus should soothe fears among Fed policymakers, but upside surprises have been the theme of late. Another strong print will raise significant questions about whether policy is restrictive enough and if the Fed will be in a position to cut at all this year, which some voices have posed already.

Markets

Markets have woken with a jubilant mood this week after bourses across Japan, the US, and Europe all secured fresh record highs last week, driven by a robust US economy, incoming rate cuts, and an AI boom. Japan’s Nikkei 225 pushed through the 40,000 mark for the first time today, having now risen for five weeks straight as foreign capital takes advantage of the cheap yen to flood in.

Main Economic Events (All Times CET)

8:30am: Swiss CPI
9:00am: Spanish Unemployment Change
10:30am: Eurozone Sentix Investor Confidence

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