October 22, 2024

“The combination of strong US data, cautious Federal Reserve speakers, and the US election has contributed to a risk off environment with rising US yields and a rallying dollar. Today is packed with central bank speakers from the ECB and the Bank of England, and the market will be looking to fine-tune its expectations on future rate cuts.”

Sam Cornford – Head of Trading

USD

The dollar is getting a boost from a rise in Treasury yields this week, particularly at the longer end of the curve. There are several reasons why: a) the expected terminal Fed rate in two years’ time has risen from 2.85% to 3.40% this month because of the US economy’s continued resilience; b) the Fed’s Logan and Kashkari supported a slower pace of rate cuts over the coming quarters yesterday; and c) the rising prospect of a Trump win increases the chance of higher borrowing to cover his proposed tax cuts. The ’Trump trade’ was most visible in the more than 0.6% drops in the Aussie and Kiwi dollars yesterday, thanks to their close correlation with China, although it was the yen that suffered the most owing to its sensitivity to the widening 10-year yield differential. The Fed’s Harker speaks today but the focus is on the longer list of European central banker speeches at the IMF meetings in Washington.

GBP

Sterling gave way to a rising dollar yesterday and is trading flat on the week against the euro ahead of Governor Bailey’s comments this afternoon. We are back above 1.30 this morning, but any further dovishness from Bailey could catalyse a more sustained move lower. A November rate cut is fully priced but only 17bps are pencilled in for December – we could see this rise if he sticks to his previous comments, but there is a similarly good chance that he clarifies and tones down the calls for the BoE to become more ‘activist’. Greene also speaks again today, after her familiar call for a ‘cautious, gradual approach to easing’ in the FT yesterday, and we also hear from Breeden later in the evening.

EUR

A frankly ridiculous number of ECB speakers will dominate the headlines today. President Lagarde gives an interview on Bloomberg this afternoon, but the focus should be on the members we have not yet heard from following last week’s cut, including Centeno, Knot, Holzmann, Villeroy, and Rehn. This is where the data-dependent, zero pre-commitment stance of the ECB tends to fall apart, and we get to hear what the individual members expect is going to happen. Simkus yesterday suggested that rates may need to fall below levels considered ‘neutral’ policy and into stimulative territory to slow down the disinflationary trend. Bets on a 50bp rate cut in December have been pared back over the past day or two to only 23%, but there is plenty of room for these to regrow if policymakers sound dovish and Thursday’s PMIs come in weak. That could threaten a return to the 1.07s for the first time since the early summer.

Markets

Geopolitical tensions, US election uncertainty, and rising bond yields all meant that equities cooled off broadly yesterday as gold rose ever higher.

Main Economic Events (All Times CET)

8:00am: UK Public Sector Net Borrowing
3:25pm: BoE Governor Bailey speaks
4:00pm: ECB President Lagarde speaks
7:00pm: ECB’s Villeroy speaks
10:15pm: BoE’s Breeden speaks

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