November 21, 2024

“Geopolitical uncertainties are keeping the market on edge this week, and the momentum is firmly in the dollar’s favour this morning. Tomorrow morning’s PMI surveys are going to be crucial for rate cut expectations next month, particularly for the euro.”

Sam Cornford – Head of Trading

USD

The dollar gained 0.4% yesterday despite an absence of meaningful data. The situation in Ukraine escalated further over the last 24 hours – the use of British Storm Shadow missiles added another Western power helping to strike inside Russia, and Russia has reportedly responded with ballistic missile attacks overnight. Things appear to be heating up as each side looks to increase their leverage when it comes to ceasefire talks in the new year. The prospect of Russia upping the ante further is putting downward pressure on risk appetite and keeping the safe havens supported. At the same time, markets are becoming more convinced that the Federal Reserve will pause rates at the December meeting, with only a 35% implied probability of a cut now priced. Bowman’s comments that progress on inflation appears to have stalled and that risks are greater for inflation than for jobs probably had a part to play in that yesterday. Today, we get the weekly jobless claims report and some more Fed speakers. Initial claims have been relatively strong and stable for a long time now, and it would take a big jump to spook markets into pricing in more easing in December.

GBP

While sterling managed to hold some gains against the euro from yesterday’s 2.3% CPI beat, GBP/USD felt the pressure from increasing geopolitical risk and the hawkish repricing for the Fed. Ramsden added to some of the dovish commentary from the Bank of England this week with some emphasis on his view that inflation could stay closer to the 2% over the MPR’s forecast period. The lack of data today puts the focus on the US and geopolitics until tomorrow’s retail sales and PMI figures. Retail sales are expected to have contracted by 0.3% in the month of October after rising 0.3% in September.

EUR

Several headwinds are threatening a retest of the 1.05 level for the euro in the second half of this week. The eurozone’s proximity to Ukraine naturally makes the euro more susceptible to the geopolitical risk off moves that we have seen over the past few days. European gas prices have already risen to the highest level since November 2023. At the same time, the momentum for US rates has extended the two-year US yield advantage by 7bps so far since Tuesday. And while the ideas were not anything new, the headlines from the ECB’s Financial Stability Review were quite ugly, with the warning that another debt crisis could be on the horizon if governments cannot fix the persistent issues of low growth and high deficits. As always, we are seeing a variety of commentary from ECB policymakers from both sides of the hawk/dove spectrum, and that should continue today. There is also some consumer confidence data, but the focus for traders will be squarely on tomorrow’s PMIs, particularly given that they have recently risen to the top of the most influential data points for the ECB.

Markets

The escalation in Ukraine has kept risk appetite subdued this week, hurting sentiment and equites while lifting the likes of oil and gold. Nvidia once again beat earnings estimates for Q3 and gave Q4 forecasts above expectations but, given that investors have become accustomed to huge surprises, it wasn’t enough to justify the 5% rally in the lead-up to the release. Nvidia stock fell up to 5% in afterhours trading before paring losses to around 2.5%.

Main Economic Events (All Times CET)

8am: Norway GDP q/q
8am: UK Public Sector Net Borrowing
2:30pm: US Jobless Claims
4:00pm: Eurozone Consumer Confidence

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