October 11, 2023

“In the absence of market-moving data, dovish Federal Reserve comments continue to drive the currency markets this week, which have slowly chipped away at the dollar’s strength. The data diary picks up today, however, and US PPI inflation this afternoon will give us solid clues towards the critical CPI print due tomorrow afternoon.”

Sam Cornford – Head of Trading

Main Headlines

According to forecasts published by the IMF, the UK is expected to have the slowest-growing economy among the G7 nations in 2024. The IMF estimates that British GDP will expand by 0.6% in 2024, a significant downward revision from a previous forecast of 1.0%. In comparison, Germany and France are expected to experience growth rates of 0.9% and 1.3%, respectively. The weak economic outlook for the UK is attributed to several factors, including the need for the Bank of England to maintain elevated interest rates to combat the country’s persistent inflation rate and the lingering effects of the surge in energy prices that occurred last year

Across the Atlantic, Republicans in control of the US House of Representatives faced an important decision as they heard pitches on Tuesday from prominent party members Steve Scalise and Jim Jordan, both vying for the influential position of speaker. This decision comes amidst mounting pressure from an ongoing conflict in the Middle East and the looming threat of another government shutdown. As lawmakers exited a closed-door forum, it was reported that neither Scalise, who serves as the House Majority Leader, nor Jordan, who chairs the Judiciary Committee, appeared to have a clear advantage. The Republican Party was set to conduct a secret ballot vote to select their nominee for the speaker position on Wednesday.

GBP

Sterling has steadied this morning after notching further gains yesterday in the absence of any bullish push from the UK side. It was a correction in US bond yields and an improving risk appetite that boosted most G10 currencies yesterday, although there was still plenty of non-market-moving releases for markets to chew on. The Bank of England stated that the UK banking system remains resilient but warned that persistent inflation and high interest rates make for a challenging risk outlook.  The IMF, meanwhile, in its World Economic Outlook report, predicted that the BoE would need to raise rates further to 5.5% and hold them for a significant duration, owing to more elevated inflation compared to other advanced economies. A materialisation of this call would be GBP-supportive well into next year. The macroeconomic calendar remains quiet today, but the GDP print early tomorrow morning could generate significant price action for the pound.

EUR

The euro has moved in lockstep with sterling for the past week, calming this morning after a few firm sessions. German final CPI this morning was unchanged on the preliminary estimate at 0.3% month-on-month, and today we await the release of the ECB’s inflation expectations for August, for which the three-year-ahead value is expected to rise from 2.4% to 2.5%. Three ECB officials are also due to speak – markets will keep a close eye on potential responses to the unified dovish pivot from Federal Reserve speakers so far this week.

USD

The dollar is limited to range-bound trading today following some high intraday volatility on Tuesday. Monday’s haven strength has all but fizzled out as markets shrug off the geopolitical risk emanating from the Middle East. Instead, attention has turned to a dovish pivot in Federal Reserve rhetoric, with Atlanta Fed President Bostic going one step further yesterday commenting that, unless the outlook changes significantly, there is no need for further hikes. Investors quickly dialled down rate expectations further, sending US bond yields plummeting again and interest futures markets repricing hike probabilities for the end of the year downwards to only 30%. There is little extra dollar weakening to come through this channel without a data-driven impulse, however, given that somewhat of a negative feedback relationship exists where a loosening of financial conditions through falling yields actually then increases the need for the Fed to hike again. Today, the less-favoured PPI inflation index will precede the crucial CPI print tomorrow, and FOMC rate decision meeting minutes are released this evening.

Markets

European stocks faced a pause after registering their largest gain of the year on Tuesday. Disappointing corporate news acted as a counterbalance to the optimism concerning interest rates and China’s economic stimulus. The Stoxx Europe 600 index showed a decline following the nearly 2% surge on Tuesday. Notably, luxury-goods maker LVMH faced a significant drop of up to 7% after reporting softer sales figures, indicating a potential slowdown in the post-pandemic luxury market. Companies such as Richemont, Christian Dior SE, and Burberry Group Plc also experienced declines of more than 4%.

Main Economic Data/Central Banks/Government (All Times CET)

8:00 a.m.: Germany Sept. CPI
9:00 a.m.: Turkey Aug. Current Account
10:00 a.m.: ECB Aug. CPI Expectations
10:15 a.m.: ECB’s Knot and Fed’s Bowman speak in Marrakech
11:00 a.m.: UK and Switzerland sell bonds, Italy sells bills
11:30 a.m.: Germany sells bonds
12:00 p.m.: Riksbank’s Bunge speaks
1:00 p.m.: ECB’s De Cos speaks
2:30 p.m.: US Sept. PPI
4:15 p.m.: Fed’s Waller speaks
5:15 p.m.: ECB’s Villeroy speaks
6:00 p.m.: Russia Sept. CPI
6:15 p.m.: Fed’s Bostic speaks
8:00 p.m.: Fed publishes meeting minutes

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