November 27, 2023

“The dollar is staring at its weakest monthly performance in a year amid a dramatic turnaround in the greenback’s fortunes this autumn, as expectations grow that the Federal Reserve has reached its rates peak. Sterling is among the currencies in the strongest position to capitalise on this selloff at the moment, boosted by stubborn inflation and a recent turnaround in activity. US and eurozone inflation figures take centre stage in steering these narratives this week.”

Tim Hallinan – Trading Director

Main Headlines

German Chancellor Olaf Scholz pledged on Friday to finalise the 2024 budget by the end of this year, aiming to reassure concerned citizens and investors in Europe’s largest economy. The assurance comes after a court ruling invalidated the government’s spending plans, forcing a freeze on most new spending commitments. The constitutional court declared unconstitutional the plans to reallocate pandemic funds to green projects and industry subsidies, resulting in a significant reduction in the federal budget. Scholz stated that the government would request parliament to lift Germany’s debt brake, which limits the structural budget deficit to 0.35% of GDP, in order to secure planned aid for this year.

Support for British Prime Minister Rishi Sunak’s Conservative Party has increased by four percentage points following the announcement of tax cuts and financial support, according to polling conducted by YouGov. The survey, conducted after the budget changes, revealed that support for the Conservatives rose to 25%, up from 21% a week earlier. However, the Conservatives still lag behind the opposition Labour Party by 19 percentage points. Only 18% of respondents believed that the budget measures would improve the financial situation for themselves and their families.

GBP

Sterling continues its stellar November rise as it enjoys its best month in a year, on track to gain almost 4% against the dollar. Its unexpected return to marginal economic expansion on Thursday further fuelled its bullish momentum amid a continued slowdown in the US data. The strong data left markets pricing in a scenario where the Bank of England cuts later and at a slower pace, culminating in only around 40bps of rate cuts next year, far less than in the US or eurozone. Extra gains this week will likely depend on more disappointment in foreign macro releases, however, given sterling’s light calendar. The Confederation of British Industry’s realised sales index this morning is expected to improve slightly on October, but to remain deep in contraction.

EUR

The euro is hovering at a 3-1/2-month high, buoyed by improving global risk sentiment. The German business climate improved for a third month in a row in Friday’s data release after marginal beats on the flash PMIs the previous day. ECB President Lagarde is expected to talk this afternoon, but the market mover for the euro this week will be the flash estimates of November CPI on Wednesday and Thursday, where core inflation is expected to continue to fall sustainably towards the ECB’s target despite a spike in the volatile headline figure.

USD

The dollar index is on track for its worst month in a year as expectations build that monetary tightening is over and the next move in rates is a cut. Buoyed sentiment surrounding a medium-term decline in borrowing costs continues to boost the appetite of investors to shift portfolio capital away from US Treasury bonds and into riskier assets and emerging markets. Friday’s composite PMI figure held steady at 50.7 for a decelerating US economy, catalysing a further dollar selloff that afternoon. Markets will look to new home sales data this afternoon in the run up to Thursday’s Fed-favoured PCE inflation index, which is set to affirm the bearish dollar trend when month-on-month inflation falls from 0.3% to 0.2% in November.

Markets

Asian stocks swung to a loss and US and European equity futures fell as slowing Chinese industrial profit growth sapped optimism after last week’s global share-market rally. China shares led declines as the data added to concern about deflation in the world’s second-largest economy. The Hang Seng China Enterprises Index slipped as much as 1.4%.

Main Economic Data/Central Banks/Government (All Times CET)

11:30 a.m.: EU sells bonds
2:50 p.m.: France sells bills
3:00 p.m.: ECB’s Lagarde speaks
3:00 p.m.: Israel Rate Decision
4:00 p.m.: US Oct. New Home Sales
UK Global Investment Summit. Speakers include Blackstone CEO Stephen Schwarzman
Cyber Monday
Markets are closed in the Philippines, India

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