November 27, 2024

“The euro is rallying this morning as investors price out ECB cuts following some hawkish comments from Germany’s Schnabel. US inflation and GDP is the focus today, before liquidity thins towards the end of the week.”

Sam Cornford – Head of Trading

USD

The FX impact from Trump’s online tariff threats faded throughout the day and the dollar ended relatively flat, as the markets appeared to consider them more as a starting point for negotiations rather than a concrete policy move. The damage for the Canadian dollar was only half a percent all told, and the likes of EUR and GBP came out unscathed overall. This morning some hawkish comments from the ECB’s Schnabel, in part because of the inflationary impact of Trump’s deglobalising efforts, have put the greenback on the back foot. It has risen 6% since the beginning of October and the market is heavily long dollars, and that does appear to be curtailing its momentum this week, but the data this afternoon looks to be relatively supportive for the dollar. The second estimate for Q3 GDP should see growth hold in the above-potential 2.5-3.0% range, and core PCE inflation is expected to remain sticky at 0.3%, keeping the prospect of a rate hold alive in December. That outcome is currently priced at a 60% probability.

GBP

The lack of UK data means that sterling is generally tracking the euro this week. Huw Pill was relatively hawkish in his speech yesterday and again emphasised the centrality of services inflation in the MPC’s decision-making, but he gave few reasons to adjust BoE pricing away from the three rate cuts pencilled in for 2025. For context, that is half as many as expected for the ECB and around in line with the Federal Reserve – that is largely what is keeping GBP/EUR in the 1.19-1.20 area. There is no domestic data until Friday, so US and eurozone inflation data will be key over the next couple of days.

EUR

The euro is trading above 1.05 again after Isabel Schnabel shot down bets on an accelerated ECB easing cycle this morning. She expressed a ‘strong preference’ for a ‘gradual’ approach, arguing that rates may already be very close to neutral levels and accommodative rates are unnecessary. This surprisingly hawkish commentary has stood out, given both Schnabel’s more neutral stance in recent months and repeated concern among her colleagues about the growth outlook. One of the main motivators behind the newfound caution is Trump, with his efforts to fragment global trade argued to have an inflationary effect for the eurozone. That contrasts with one of the main assumptions that has hurt the euro so badly – namely that the negative growth shock would bring inflation lower and cuts forward, rather than the other way around. In other news, French politics is back in focus as risks rise that Barnier’s government collapses and the National Assembly cannot get a budget through with some fiscal tightening. The spread between 10-year French OAT and German Bund yields has widened to 90bps, which is the highest since the debt crisis 12 years ago.

Markets

US stocks ended the day higher yesterday in a relatively quiet session as markets brushed off Trump’s tariff threats the night before. The Euro Stoxx 50 fell 0.4%, meanwhile, dragged by auto makers and Mexico-exposed companies.

Main Economic Events (All Times CET)

2:00am: Reserve Bank of New Zealand Rate Decision
10:30am: German GfK Consumer Confidence
2:30pm: US Q3 GDP 2^nd Estimate & Jobless Claims
4:00pm: US Core PCE Inflation

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