November 22, 2024

“It’s PMIs day, and the dollar is hovering near its highest level in over a year after a big surge yesterday. This has been compounded by the activity data we have seen from France and Germany this morning which, like the UK retail sales print earlier, has not been pretty.”

Tim Hallinan – Trading Director

USD

The dollar broke through key thresholds to reach a 13-month high yesterday amid a broadly supportive environment for the greenback. There was no obvious trigger for the sharp increase in momentum in the mid-afternoon, but escalation in Ukraine, a relatively strong jobless claims print, and some hawkish Fed commentary this week have provided investors with plenty of reason to keep buying the dollar. Putin’s ballistic missile strike on Dnipro was a clear signal of intent and naturally added to an air of nervousness in European markets, although the 6bps in cuts that were priced out of the Fed curve in 2025 yesterday were probably the more important factor behind the move. Today’s PMI figures could either reverse or reinforce the dollar’s extra strength this week, and are once again expected to signal continued solid expansion. The consensus is looking for slight increase from 54.1 to 54.3 – compare that to the eurozone, where activity has mostly been contracting since September.

GBP

A poor retail sales figure, alongside some downward revisions to the September numbers, has pushed sterling to a six-month low against the dollar this morning. Nervousness around the budget appeared to have a stronger downward effect on consumer spending than had been expected, with sales down 0.7% in October. The pound had already broken below 1.26 yesterday and is now threatening 1.2550 ahead of the PMIs. GDP data has softened considerably in the second half of the year and the PMI figures have inched lower too, but the UK has so far retained a growth advantage versus the eurozone in the survey data. While services have been performing broadly in line with the continent, the manufacturing sector has remained above water in recent months – something Europe has not seen in a long time.

EUR

The euro decisively broke below the 1.05 handle yesterday, and rate spreads are moving against it again this morning. The French and German PMIs have both printed below expectations, with the composite French figure strongly disappointing at 44.8, versus the 48.3 estimate. Remember that a number below 50 indicates economic contraction, while one above that mark refers to expansion. Germany plunged deeper into contractionary territory too, at 47.3. When the ECB switched from cutting once per quarter to easing at consecutive meetings back in October, it was soft PMI figures that solidified a shift in focus from the upside inflation risks to the downside growth risks. Those growth worries will have intensified today, and that ups the urgency for policymakers to cut to support the economy. The implied probability on a 50bp cut in December has risen to 35%.

Markets

Despite nervousness in European FX and commodities, key stock gauges on both sides of the Atlantic rose between 0.5-0.8%. Energy and tech companies were behind the surge in Europe as gas prices rose and Nvidia results were digested, while the rise in the US appeared more broad-based. Gold, meanwhile, headed for its best week in a year as the Ukraine conflict fuelled safe haven demand.

Main Economic Events (All Times CET)

8:00am: UK Retail Sales
9:30am: ECB President Lagarde speaks
10:00am: Eurozone PMIs
10:30am: UK PMIs
2:30pm: Canada Retail Sales
3:45pm: US PMIs
4:00pm: US UoM Consumer Sentiment

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