Morning Report
October 10, 2024
“The US dollar has now recovered almost 3% since the end of last month, as the market continues to digest last week’s strong data that has upended a picture of aggressive rate cuts from the Federal Reserve. Today’s CPI report will be key in determining whether it can hold onto these gains and push higher, or whether it is due a retracement.”
Sam Cornford – Head of Trading
USD
There is a lot to cover for the US dollar today, which continues to eke out gains as markets come to the conclusion that the Federal Reserve is unlikely to follow up with further aggressive moves. That much was clear from the FOMC meeting minutes released last night, with a ‘substantial majority’ supporting the 50bp move but ultimately a broad consensus that there was no pre-commitment to similar moves in the future. While there were plenty of dovish comments, including suggestions from some that strains in low-income households and a cooling labour market could imply a sharp drop-off in consumer spending growth, last week’s monster payrolls report and strong services data made much of the content somewhat outdated. We are nearing some key thresholds as the dollar rebounds, with USD/JPY knocking on the door of 150 once again and EUR/USD crawling back down to 1.09.
Today, US CPI is the key catalyst for the next reassessment of the Fed’s likely policy path. The consensus is for a drop to 2.3% on a yearly basis and to 0.2% month-on-month. That would bolster the case for focusing on the employment side of the mandate and give the greenlight for the Fed to continue cutting. A downside surprise could reintroduce bets on some 50bp moves, while a surprise to the upside would likely see the dollar grind higher and corroborate the more hawkish picture painted by last week’s jobs report.
GBP
Sterling hit a fresh one-month low overnight but has regained some modest upward momentum this morning. The two things in focus for the pound this month are the Bank of England, for which we will get some wage growth and inflation data next week, and the UK budget announcement on the 30th October, where speculation is pointing to some extra tax alongside some tweak to the fiscal rules that allows for increased borrowing for capital spending. For now, however, traders will look to the US inflation data this afternoon and a UK GDP report for August first thing tomorrow morning. The 0.2% estimate broadly aligns with the British economy’s slow-but-steady growth picture that has seen it outperform the eurozone this year.
EUR
Investors will pore over the ECB meeting minutes today as they look to the October rate decision next week. The market remains relatively certain that the outcome of next week’s meeting will be a rate cut – France’s Villeroy called it ‘very probable’ yesterday – and there should be a couple of clues about that conviction in the minutes. Remember that, originally, there was zero forward guidance offered in the statement and press conference when they cut rates in September, partly because being explicit about the future effectively forced them into a move back in June. In other news, Germany unsurprisingly revised its GDP forecast for the year down to -0.2% but remained optimistic about a 1.1% rebound next year. In Norway, a fresh downside surprise in core inflation at 3.1% raised questions about how long the Norges Bank can stick to its extremely hawkish stance, given that it had previously forecasted 3.3%.
Markets
Equity volatility continued to be focused in China overnight, with the CSI 300 recovering 3% following yesterday’s 7% loss as investor optimism grew about potentially trillions of yuan in fiscal stimulus to be announced at a press conference on Saturday. US stocks climbed, and the S&P 500 is now up 5.4% in the last month alone.
Main Economic Events (All Times CET)
8:00am: Norway CPI
8:30am: Riksbank Governor Theeden speaks
1:30pm: ECB Meeting Minutes
2:30pm: US CPI & Unemployment Claims
5:30pm: SNB’s Martin speaks
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