October 03, 2024

“Sterling is falling off a cliff this morning after Governor Bailey decided to depart from the Bank of England’s cautious stance to suggest that an accelerated pace of rate cuts could be on the way if the data improves. The dollar has recovered strongly this week, although this afternoon’s ISM services PMI and tomorrow’s headline payrolls report will likely define its performance this week.”

Tim Hallinan – Trading Director

USD

A geopolitical safe haven bid, Powell’s hawkish rhetoric, some strong jobs data, and a sea of idiosyncratic weakness in the rest of the G10 have coalesced to lift the dollar to a three-week peak this morning. The market is generally becoming a bit more sceptical about rapid Fed easing, having trimmed the implied probability of a 50bp cut in November down to 25% after the uptick in labour demand and hiring in this week’s jobs data so far. It is a notoriously meaningless predictor of actual hiring, but ADP non-farm employment gains rose from 99k to 143k in September yesterday and that gave the dollar a boost. Elsewhere, the yen fell off a cliff yesterday, crashing 2% as Japan’s new PM met with the BoJ’s Ueda and emerged with some surprisingly dovish language, arguing that it is not the right environment for further rate hikes. Some soft Swiss inflation data this morning also has the dollar up 0.3% against the franc, and the rising prospect of a big cut next week has NZD/USD almost 0.5% lower. Today, traders will be eyeing unemployment claims and the ISM services PMI. The survey estimates are expecting a relatively unchanged 221k figure for the first and a slight improvement in the latter from 51.5 to 51.7. The strength of the services sector will have a direct impact on Fed pricing and is likely to be the biggest traded event today – any weakness and 50bp cut bets will inch higher again.

GBP

Andrew Bailey chose to finetune market pricing for the Bank of England this morning. The pound has sunk 0.8% this morning on the back of a Guardian interview overnight, in which Bailey said that the BoE could become a bit more ‘activist’ on rate cuts if the inflation data continues to move in the right direction. This is a slap in the face for sterling bulls that had pinned their hopes on a sluggish BoE cutting cycle, and it has somewhat upended the narrative of policymaker caution and gradualism that had lifted sterling close to the 1.35 handle last month. We are well below 1.32, now that sterling’s yield advantage versus the dollar has contracted by around 13bps. As it stands, GBP/EUR is looking at its worst day since 2023.

EUR

EUR/USD is knocking on the door of 1.10 once again as the euro suffers from the double whammy of Fed cuts being priced out and ECB cuts being priced in. It is clear from the speeches we have heard this week that policymakers have become very supportive of moving again in October. The most stark example is from Schnabel, who is typically is one of the most hawkish members of the Governing Council, but has now suggested that the ECB ‘cannot ignore the headwinds to growth’ and that the 1.8% CPI print perhaps gives them some more room to come to the eurozone economy’s rescue. One month ago, the expected year-end ECB rate rose to nearly 3.2%, and now it is a touch higher than 2.8%.

Markets

Equities drifted sideways across the US and Europe yesterday, but Japan’s Nikkei jumped by 2% as PM Ishiba completed his transition from monetary hawk to dove and signalled a lack of desire for further hikes. Oil continued to grind higher, and at its peak yesterday it had gained over 8% from before the Iranian missile attack.

Main Economic Events (All Times CET)

8:30am: Swiss CPI
10:00am: Eurozone Final PMI
10:30am: UK Final PMI
2:30pm: US Unemployment Claims
3:45pm: US Final PMI
4:00pm: US ISM Services PMI

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