October 17, 2024

“With today’s ECB decision, the focus is on the future. The market is highly certain that policymakers are going to start picking up the pace with a back-to-back cut, and they will be keen to hear how the Governing Council has assessed the risks to growth and undershooting the 2% target.”

Tim Hallinan – Trading Director

USD

The dollar continues to grind steadily higher, amid increasing expectations for the Fed to ease less aggressively than first thought and the rising probability of a Trump election win in three weeks’ time. The race remains close, but there has been a clear sentiment shift since the beginning of the month towards expectations for a Republican win, thanks to the polls showing narrow leads across many of the swing states. And Trump’s verbal commitment to inflationary policies, which would limit the scope of Fed cuts, is as strong as ever, particularly regarding import tariffs. This could see some dollar buying into the election as markets hedge against a Trump win. Retail sales are the main event today, and markets will be looking to refine their assessments on the strength of the American consumer. The consensus expects a 0.3% gain month-on-month for both the headline and the control measures. This week’s jobless claims figure is expected to be high again after last week’s spike, but this is likely to be muddied signal given the recent hurricanes and strikes.

GBP

Sterling is trading at a two-month low this morning after yesterday’s 1.7% CPI print nailed on a Bank of England rate cut next month and lifted the implied probability for a follow-up in December. The British rate cutting cycle is still expected to be more measured than its peers in the US and the eurozone, but that gap closed up quite dramatically with the drop in services inflation – the BoE’s final hurdle – from 5.6% to 4.9%. The pound seems to be quite comfortably below the 1.30 handle for now and will likely rely on a weak US retail sales report to move back higher today. The surveys are expecting a particularly weak print when the UK releases its own retail sales data tomorrow morning, with a 0.4% month-on-month contraction on the cards.

EUR

An ECB rate cut today is priced at 95%. That’s because: (i) the PMI survey data showed the eurozone economy returning to a contractionary state in September, and (ii) inflation has now fallen to the 2% target – at least temporarily. This certainty directs the focus towards how policymakers characterise the outlook for the future. In September, Lagarde stuck to her no-forward-guidance principle that intentionally left investors in the dark in an attempt to retain full flexibility for each decision. That never lasts beyond the meeting itself, however, and if we do not get any solid clues from today’s statement and press conference, we will simply wait to see what policymakers tell the public when they start speaking next week. Because the market is already pricing in back-to-back cuts for the next five meetings, for EUR/USD to move lower there will need to be some suggestion that some 50bp moves could be thrown into the mix, perhaps owing to greater concern about the headwinds to growth. Or Lagarde would have to imply that ECB rates will eventually settle at a lower rate than the markets are currently pricing, which is around 2%. On the other hand, the euro could push back into the 1.09s if she plays down the recent weak data and stresses caution about the path forward.

Markets

US stocks recovered some of Tuesday’s tech-related slide yesterday, helped by further earnings beats for airlines and financials, including Morgan Stanely most recently. US corporate credit spreads have fallen to their tightest in nearly 20 years, which means in short that the market is pricing in the smallest amount of default and recession risk into the bond market in almost two decades. Oil remains soft, but traders are still looking out for an Israeli retaliation against Iranian military facilities.

Main Economic Events (All Times CET)

2:30am: Australian Employment Change
2:15pm: ECB Rate Decision
2:30pm: US Retail Sales & Jobless Claims
3:15pm: US Industrial Production

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