October 02, 2024

“Rising geopolitical risks injected some volatility into the FX market yesterday, which naturally lent some support to the US dollar, the yen, and the franc, as well as the oil-linked Canadian dollar. As investors await the next move in the Middle East, the focus today will be on a long list of central bank speakers and some US labour market data.”

Sam Cornford – Head of Trading

USD

Rising geopolitical risk in the Middle East dominated the price action yesterday, lifting the classic safe havens: USD, JPY, CHF, gold, oil, and US Treasuries. Support from an initial 6.5% spike in the price of oil made the Canadian dollar the best performer in the G10, while the likes of SEK and NZD were sold off, with the latter also suffering from rising bets on a 50bp rate cut next week. The innate unknowability around the development of geopolitical clashes means that markets are notoriously poor at pricing in the risks, and the typical response to flare-ups in the region has been a kneejerk reaction followed by an unwind once the nerves have calmed down. For the conflict to have a material and long-lasting impact on the market, things need to escalate to the extent that it could meaningfully disrupt the global economy through constrained oil supply or rising shipping costs, for example. This means that traders are now looking for the size of Israel’s response to weigh up those risks.

On the data side, it was a mixed bag yesterday. The labour market appeared to be a bit stronger than expected, with job openings rising to 8.04M. However, it still fits within a bumpy downward trajectory, and markets also took note of the dip in the quits rate to 1.9%, which suggests that workers are becoming less confident in their ability to find another job. The Vice Presidential debate last night had minimal impact, and today traders will be looking to the various Fed speakers and the ADP payrolls report.

GBP

Sterling suffered a heavy 0.7% loss against a rising dollar yesterday and even cooled slightly against the inflation-battered euro, despite touching a fresh two-year high in the early afternoon. With the UK calendar empty, geopolitical developments in the Middle East and the US labour market will continue to be the pound’s dominant drivers throughout the second half of the week. PM Keir Starmer’s first talks with European Commission President von der Leyen in Brussels may impact sterling at the margin, but long-term gains from a closer EU relationship are more likely to come over time, depending on what is delivered in the so-called ‘reset’ to relations given that rejoining the single market or freedom of movement has been ruled out.

EUR

If the transformation of the October rate cut from an impossibility to a near certainty wasn’t enough to take EUR/USD materially lower this week, a surge in geopolitical risk managed to do the job. We are now back below the 1.11 handle as a combination of a poor growth outlook, sub-2% inflation, fiscal misery in France, and some particularly dovish rhetoric, among other things, has squeezed the euro’s summer gains. Eurozone-wide inflation was confirmed at 1.8% yesterday, and Kazaks this morning has one-upped Lagarde’s dovish speech from a few days ago, telling Reuters that there is a ‘clear-cut’ case for cutting at the next meeting. In an unusual endorsement of market expectations, he argued that he ‘very much agree[s] with the market pricing that the decision in October will be very clear’ – it appears the ‘meeting-by-meeting’ approach is being thrown out of the window. It is relatively quiet today but we do get a couple of speeches from de Guindos and Lane.

Markets

The risk-off mood in light of Middle East tensions saw stocks drop globally as investors fled for safer assets. The major indexes did finish somewhat higher than their lowest points in general, however, once the nerves had calmed down. The Nasdaq sank 1.4%, the Euro Stoxx 50 fell 0.9%, and Japan’s Nikkei suffered a 2.2% hit in this morning’s session.

Main Economic Events (All Times CET)

11:00am: Eurozone Unemployment
2:15pm: US ADP Non-Farm Employment Change

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