March 06, 2024

“Fed Chief Powell, the JOLTS survey, and the UK government budget update provide us with a triple headline diary to inject some volatility into the FX markets. A modest tax cut in the UK and some hawkish patience in the US are on the cards today.”

Tim Hallinan – Trading Director

Main Headlines

Gold prices surged to a record high of $2,141 yesterday, buoyed by high levels of central bank demand and falling US yields, which reduce the opportunity cost of the non-yielding metal. The precious commodity is now 30% higher than levels seen in 2022, having pushed through the $2,000 mark late last year.

British Chancellor Hunt is set to deliver his spring budget update at around 12:30pm (GMT), where most expect some limited tax giveaways in an effort to lift up the Conservative’s position in the polls. A 2pc cut in national insurance has been leaked this week, in a ‘pro-worker’ policy designed to reward work, rather than a more election-friendly income tax cut.

GBP

A four-day winning streak has lifted sterling to a one-month high against the dollar, ahead of the UK government budget update this afternoon. As mentioned before, the most probable outcome for the pound is a muted reaction and potentially a small boost from a measured tax cut. The proposed national insurance cut pales in comparison to the rocketing tax burden as a fraction of GDP over the past couple of years and, given the limited headroom for spending, would at most boost growth modestly and risk a small delay to the Bank of England’s policy easing cycle. The Truss-era gilt turmoil will be in the back of traders’ minds heading into the announcement, but it will also be at the forefront of Hunt’s, who is likely to remain cautious and to keep his policies funded. Also on the calendar is the construction PMI, which is expected to continue its steady trajectory back towards expansionary territory.

EUR

Tomorrow’s ECB decision looms for the euro, which has struggled to find direction ahead of the key risk event. The final services PMI reconfirmed the first expansion in activity since July 2023 yesterday morning, helping the euro to gain some ground as similar data slipped in the US. Today’s diary gives us only a low-impact retail sales release for the eurozone, with headline events in the UK and US set to dictate the euro’s trading today. Euro investors will be squarely focused on the ECB decision tomorrow, however, where policymakers are likely to lean on the stronger measures of services inflation and wage growth to stick to the script of patience, but with increasing acknowledgement of the pace of disinflation and a potential hint towards cuts in Q2.

USD

Powell and JOLTS are today’s biggest impulses for the dollar. A lower-than-expected ISM service PMI print sparked a modest selloff in the greenback yesterday after the employment and price indexes contracted from high levels in the previous month, likely bolstering hopes for a softened payrolls figure this Friday. Powell’s testimony to Congress should at its core recognise the strong progress made on inflation and again acknowledge a peak, but the base case for many is that he sticks to the hawkish script afforded by the exceptional strength of the US economy, reiterating the lack of pressing need to cut without first waiting for confirmatory data. The JOLTS Job Openings survey will then be scrutinised for its details on labour market tightness – the supply and demand imbalances driving wage growth – to gauge the trajectory for US inflation and therefore the Fed’s rate path this year.

Markets

Equities tumbled yesterday as traders pulled the three major Wall Street indices back by over 1% each in a cautious session. An upcoming Powell speech, poor iPhone sales in China, weaker US services data, and a suspected arson attack in Tesla’s Berlin factory were among the factors weighing on market mood.

Main Economic Events (All Times CET)

1:30am: Australian GDP q/q
10:30am: UK Construction PMI
1:30pm: UK Budget Update
2:15pm: ADP Non-Farm Payrolls
3:45pm: Bank of Canada Rate Statement
4:00pm: Fed Governor Powell testifies to Congress
4:00pm: US JOLTS Job Openings
4:30pm: Bank of Canada Press Conference

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