October 23, 2024

“The dollar’s relentless October rally is yet to lose steam, with a strengthening US yield advantage contrasting strongly with dovishness in Europe. Policymaker speeches are again the main catalysts today as the market looks towards the IMF meetings across the Atlantic.”

Tim Hallinan – Trading Director

USD

The grind higher in US bond yields continues to fuel a steady march higher in the dollar. The strong economic growth data and fresh concerns about an unsustainable US debt trajectory, whichever the election winner but especially under Trump, appear to be the primary drivers behind the huge 55bp rise in the US 10-year yield since the September rate decision. The IMF addressed both issues in its latest economic forecasts yesterday, upgrading the 2025 growth projection to 2.2% while also urgently calling for efforts to contain the fiscal deficit. Its forecasts for tariffs were noteworthy, which argued that Trump’s tariff plans could trim global growth by 1.2% and US growth by 1% by 2026. The yen has been by far the biggest loser from gyrations in the bond market, as investors lose hope that we will see the magical combination of further BoJ hikes and significant Fed rate cuts. USD/JPY is up 1% just this morning to 152.5, and we can expect Tokyo to ramp up the verbal intervention very soon. Today is quiet in terms of data and the focus is on tomorrow’s PMIs, but the dollar’s rally does not look to be calming down any time soon.

In Canada, the market is 80% certain that the Bank of Canada will accelerate its easing cycle to deliver a 50bp rate cut at today’s decision. This conviction mostly seems to come from the drop in headline inflation to 1.6% in September and the Fed’s precedent for a 50bp move, although the strong Canadian employment data and a hawkish repricing in the US may still be enough for the BoC to surprise the market with a smaller 25bp cut.

GBP

GBP/USD hit a fresh two-month low yesterday and pushed closer to 1.29, while holding above 1.20 versus the euro. Governor Bailey steered clear of talk about monetary policy yesterday but takes to the podium for his second of this week’s four speeches this evening. The FX market did not respond to the IMF’s upward revision to the UK growth, which sees expansion at 1.1% this year and 1.5% in 2025 and reflects the stronger activity data we have seen over the first few quarters of 2024.

EUR

The euro has dipped below 1.08 this morning, thanks to an improving US yield advantage and a dovish set of ECB comments. Lagarde reckoned that the direction of travel for rates is ‘clear’, Centeno argued that the risks are higher that inflation undershoots rather than moving significantly upward, and even typically hawkish Holzmann gave his verbal support to last week’s cut and said that more were on the way. The harmonised dovishness helped the implied probability for a 50bp move in December to inch back up to 40% and widened the USD-EUR 2-year yield differential to 192bps – the highest in over three months. ECB officials fill the diary with post-meeting speeches again today, with Cipollone, Escriva, and Knot all speaking.

Markets

Global equity gauges wavered yesterday in some jittery trading as rising US yields weigh on sentiment, with cash flowing instead to gold, which set another record high yesterday.

Main Economic Events (All Times CET)

1:30pm: Riksbank Deputy Governor Jansson speaks
3:00pm: Fed’s Bowman speaks
3:45pm: Bank of Canada Rate Decision
4:00pm: ECB’s Lagarde and Lane speak
4:00pm: US Home Sales
10:30pm: BoE Governor Bailey speaks

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