October 18, 2024

“This is a week to forget for the euro, which is now down 3% this month. The ECB prompted another dovish shift in market expectations with a strong concern for the eurozone’s growth prospects, while the UK and US have both posted strong retail sales figures. Next week’s PMIs will be key to see if there is any further downside ahead, or if a recovery is on the cards.”

Sam Cornford – Head of Trading

USD

The dollar is barrelling towards a third consecutive weekly gain, as rate expectations in Europe becomes more dovish and the US data again points to a strong consumer. It was less than a month ago that the narrative was the total opposite – the main concern back then was a non-linear deterioration in the US labour market and a cautious ECB. Then came upward revisions to personal incomes and savings rates, a 1-1/2-year peak in services activity, and a huge upside surprise on the September payrolls print. And yesterday, retail sales were the next piece of data to help revive the US exceptionalism narrative with the control group rising 0.7% versus a 0.3% expectation. The Atlanta Fed’s GDPNow model is now forecasting a monstrous 3.4% annualised growth rate for Q3, keeping the Fed on a steady downward path for rates. USD/JPY finally broke through 150 again and the verbal intervention from Tokyo has already begun, with comments this time naming the moves ‘one-sided’. There is only some housing data on the docket today, but we may get some interesting comments from Bostic, Kashkari, and Waller these afternoon.

GBP

A surprisingly strong retail sales report has helped the pound to consolidate back above 1.30 against the dollar and to touch a 30-month high versus the battered euro. The consensus was looking for a dismal 0.4% contraction and instead resilience in the UK consumer produced a 0.3% expansion. This is the third straight upside beat and a positive sign for growth in the third quarter. It also keeps Bank of England in a much more privileged position relative to the ECB, where growth concerns have become a key driver of monetary policy. While markets are now contemplating a 50bp rate cut from the ECB in December, they are not fully sure that the BoE will deliver a cut at all in its last meeting this year. It is a light day for data from here, so sterling will likely take its clues from the US.

EUR

With disinflation ‘well on track’ and the risks for growth tilted to the downside, the ECB cut interest rates by 25bps yesterday and communicated an inflationary outlook dovish enough for markets to price in a 40% chance for a 50bp move in December. Last month’s contractionary activity surveys appear to have spooked European central bankers, who now see inflation reaching the medium-term target a bit earlier than the second half of 2025, which they had pencilled into their forecasts only a month ago. The PMIs were enough to convince even the most hawkish members of the Governing Council to agree with the ‘unanimous’ decision to pick up the pace, and while Lagarde hinted that 50bps was not a real option this week, the door has clearly been left open to one if the data continues to surprise to the downside over the next two months. The dovish repricing pushed EUR/USD to a fresh two-month low.

Markets

Stocks were largely flat yesterday as investors dealt with Q3 earnings reports, geopolitical risk, and upcoming election uncertainties alongside the upside surprises in the US data. In the commodities world, gold’s 2024 rally has reached 30% as it hit a record high once again, in part thanks to its safe haven qualities ahead of the US election.

Main Economic Events (All Times CET)

4:00am: China GDP
8:00am: UK Retail Sales
2:30pm: US Housing Starts
4:00pm: Fed’s Kashkari speaks
6:30pm: Fed’s Bostic speaks

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