November 20, 2024

“A flare-up in geopolitical risk triggered some knee-jerk safe haven plays yesterday, which were subsequently unwound as the panic faded. UK inflation was stickier than expected, keeping the Bank of England on track for a slower pace of rate cuts, and the focus today is on wages in the eurozone.”

Tim Hallinan – Trading Director

USD

A geopolitical shock rocked markets and triggered a safe haven trade yesterday, but it couldn’t stick. After Biden signed off on Ukraine’s use of US long-range missiles this week, Putin upped the ante with a new nuclear doctrine that broadened the situations in which a nuclear strike would be on the table. JPY, USD, and CHF all surged as the news broke and markets panicked, but in typical fashion the move has been fully unwound after some reassuring comments from US and Russian officials. While the situation is calm for now, it was a potent reminder of the continued geopolitical risk in eastern Europe. In other news, a state-level non-farm payrolls breakdown for October broadly confirmed the unsurprisingly deep impact of the Florida hurricanes and Boeing strikes. We can expect a rebound in the November figures as these jobs are counted back in. Trump’s deliberations over a Treasury Secretary pick also continue, and Lutnick – likely the most bullish option for the dollar – has been ruled out, with Marc Rowan and Kevin Warsh seemingly the two main contenders now. Today is relatively light, with catalysts limited to speeches from Barr, Cook, and Bowman.

GBP

Sterling was only able to briefly pierce above the 1.27 handle following some stickier inflation data this morning. Headline inflation rose from 1.7% to 2.3%, primarily as a result of the recent uplift in the energy price cap, but of course that is not what the Bank of England has its eyes on. Services inflation – its main concern nowadays – printed slightly higher than the survey estimate at 5.0%, but in line with policymakers’ forecasts. While obviously a concern that we are not seeing progress here this month, the one silver lining is that most of the uplift in services comes from the volatile components like education, restaurants, and rents. The BoE tends to look through these on a month-by-month basis, given that they can often be highly sensitive to the day that measurements are made and by single outliers etc. Nevertheless, markets have trimmed their rate cut expectations to only 60bps by the end of 2025. Only a speech by the BoE’s Ramsden is in the diary for the rest of the day, after new MPC member Taylor emerged as one of the biggest doves on the committee in yesterday’s parliamentary hearings, where he suggested 100bps in cuts over the next year.

EUR

While a short-lived Ukraine-related selloff dragged EUR/USD down by 0.6% yesterday morning, the euro ended the day where it started in the higher end of the 1.05-1.06 range. The biggest catalyst for this morning is the quarterly release of the ECB negotiated wages measure. At one time this was considered the ultimate indicator for domestic inflationary pressures, but the obsession was thrown out relatively quickly when rate cuts began and the Q2 figure dropped sharply from 4.8% to 3.5%. A reacceleration might be a rhetorical arrow in the quiver for hawks uninterested in cutting by 50bps in December, but the inflation and PMI data is likely to be a bigger decider here. Bank of Italy Governor – and resident ECB dove – Panetta made some slightly radical comments yesterday where he called for an end to the ‘meeting-by-meeting’ approach to forward guidance and to plough ahead immediately with rate cuts to shore up eurozone growth.

Markets

Nvidia stock rallied 5% yesterday as investors gear up for its Q3 earnings release after the bell tonight. These reports have often become something of a macroeconomic event and a proxy for the AI revolution as a whole – the options market is pricing in an implied $300bn swing in market cap. The Nasdaq caught an AI tailwind yesterday to rise over 1%, and the story is positive in Europe this morning too.

Main Economic Events (All Times CET)

8:00am: UK CPI
11:00am: ECB Q3 Negotiated Wages

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