November 13, 2024

“The dollar’s post-election gains have been extended to almost 3% over the past couple of days as markets have become increasingly convinced that he will be prepared to follow through on his campaign promises in the new year. There is some quiet this morning, however, as markets prepare for a key US CPI report.”

Sam Cornford – Head of Trading

USD

The macro story will get some attention today after a week of trading on the US election. The dollar’s Trump trade momentum took it to a one-year high against the euro yesterday. The key to the greenback’s rise over the past few days is a growing impression among investors that Trump will hit the ground running with his policy priorities in January. He has been lining up loyalists in key positions, tasking border veteran Tom Homan with a mass deportation effort, picking out arch-protectionist Lighthizer to reprise his role as US trade representative, and now putting Elon Musk and Vivek Ramaswamy in charge of a government efficiency drive. The dollar’s initial surge on Trump’s 2016 election win faded away in the following months, as it became clear that it would take some time for him to push through policies whilst he was inexperienced and surrounded by establishment Republicans – none of that is the case this time around.

However, markets are taking a breather this morning ahead of today’s CPI report. The consensus is looking for an uptick in headline inflation from 2.4% to 2.6%, and for core inflation to hold steady at 3.3%. The Fed does not target CPI – it targets PCE. But the continued gulf between core CPI and the 2% target, although primarily driven by the housing sector, will be a hurdle to further cuts. The swaps market puts a December cut at 50/50.

GBP

Sterling unexplainably had a terrible day yesterday, falling 1% against the dollar even as the UK-US rate spread moved marginally in the pound’s favour. Pill gave a relatively cautious speech as he stressed that the inflation battle is still not won, and that sticky pay growth and the budget’s ‘positive demand shock’ would keep the Bank of England on a gradual cutting path. It is worth mentioning that the hawkish BoE repricing has reached quite extreme levels recently – only two further rate cuts are priced in over the next seven meetings. That makes sterling somewhat vulnerable to downside inflation shocks. Catherine Mann is unlikely to deviate from her extra-hawkish leanings when she speaks this morning, and she may give some clues around the upside inflation risks from Labour’s fiscal loosening.

EUR

The euro has hit a one-year low versus the dollar this morning. EUR/USD has been glued to the differential between two-year German Bunds and US Treasuries over the past week, even more so than usual. The widening in this spread has been driven by both: a) the prospect of a faster ECB easing cycle owing to the negative growth shock of US tariffs, and b) the inflationary impact of tax cuts, deportations, and tariffs on the US economy that will likely constrain the Fed’s ability to keep cutting. In Germany, Scholz appears to have come to an agreement with the opposition to hold federal elections on February 23^rd, with a vote of no confidence due next month. Political instability is rarely good for a currency, but there does seem to be a level of optimism around a fresh government’s ability to bypass the debt brake and increase fiscal spending, which is what many think the German economy needs.

Markets

The post-Trump equity surge lost its momentum and stocks handed back some gains in yesterday’s session. There seemed to be some profit-taking and repositioning ahead of today’s CPI report, with both the S&P 500 and the Nasdaq falling from record highs.

Main Economic Events (All Times CET)

9:30am: Riksbank Meeting Minutes
1:00pm: US CPI

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