October 09, 2024

“Ahead of the minutes from the Fed’s September meeting this evening, the dollar continues to hold strong on the back of renewed economic exceptionalism and geopolitical nerves. Tomorrow’s US CPI report is the key event this week, and an upside surprise could add more fuel to the dollar’s rally.”

Tim Hallinan – Trading Director

USD

The dollar is holding steady this week at around the levels it reached after its best week in two years – the US economy is still looking strong, the Middle East still has traders on edge, and the macroeconomic backdrop across the Atlantic remains soft. The Atlanta GDPNow forecast for Q3 GDP was raised to a staggering 3.2% yesterday, and the Federal Reserve is no longer a dovish outlier expected to ease more aggressively. The latter point was illustrated by the Reserve Bank of New Zealand overnight when they cut rates by 50bps and signalled that more big cuts were coming,  which dragged NZD/USD down nearly 1% this morning. Being the most hawkish central bank for a long time appears to be paying dividends now, and with inflation at target, it is simply a race to neutral now to pick up the economy. That is broadly the situation playing out in Canada and Sweden too, and the ECB could soon be in the same boat if both inflation and growth continue to grind lower.

The market turns to the FOMC minutes this evening, where we should get some steer on the Fed’s plan of attack for further easing. Any hints towards further big cuts are unlikely to get rates markets too excited, however, given that Powell had expressed a preference for 25bp moves even before last week’s blowout jobs report. An array of Fed speakers today includes Goolsbee, Jefferson, Collins, and Daly, and of course tomorrow’s CPI report is the highlight of the week.

GBP

The pound has slumped to a one-month low this morning. The relative quiet in the UK had been working in sterling’s favour while the Bank of England were still being priced to be significantly more cautious than the Fed and the ECB, but that is no longer the case now that markets have Andrew Bailey’s ‘more aggressive’ language on rate cuts and the upside surprises in the US to digest. The domestic focus will be on growth with Friday’s GDP report, and then the market can switch back to the rates story when we receive wage growth and CPI data next week.

EUR

The euro remains under pressure as an October rate cut is increasingly appearing to be the obvious consensus at the ECB. Now that Nagel and Schnabel have both admitted that they are open to the move, there is a rapidly dwindling pool of hawks to argue a case to keep rates on hold. While Vasle was keen to stress that an October cut would not necessarily mean that another would arrive in December, the market is fully pricing 50bps in easing before the end of the year. It is a quiet day in the eurozone, and investors are likely to look towards the US and China.

Markets

US stocks bounced back yesterday after their tepid start to the week, as traders continued to digest the data last week that showed the US economy to be stronger than expected. European equities were not so cheery, however, with disappointment around a lack of further stimulus measures in China hitting companies that depend on Chinese exports, including the luxury and mining sectors. Stocks in China itself were at one point heading for their worst drop in four years, but managed to pare back a significant amount of the losses.

Main Economic Events (All Times CET)

3:00am: Reserve Bank of New Zealand Rate Decision
1:00pm: US Mortgage Applications
4:30pm: Fed’s Goolsbee speaks

To learn more about Ballinger Group, please visit our website or our LinkedIn page.