September 15, 2023

“A Euro slump catalysed by a dovish ECB hike yesterday, compounded by further impressive US macroeconomic data, sent the Dollar Index rocketing to another six-month peak yesterday. We will look to another raft of US data later today to see if the rally can be tested.”

Sam Cornford, Partner – Head of Trading

Main Headlines

In the US, SoftBank’s Arm Holdings shares surged nearly 25% above their Nasdaq debut price on Thursday, reigniting hopes for a revival in the stagnant IPO market. Starting at $56.10, the stock closed at $63.59, valuing the British chip designer at $65 billion upon its return to public markets after seven years. Arm’s robust performance indicates a potential resurgence in investor interest in IPOs, which had been dampened by geopolitical tensions and rising interest rates in the past two years, according to market observers.

Last month, Britain saw a 14% annual increase in missed bill payments, marking the second-highest rate on record, according to Thursday’s figures. This rise, from 0.82% in July to 0.83% in August, mainly affects direct debits used for utility bills, mortgages, and credit card repayments. These numbers, recorded since January 2019, indicate growing financial strain on households. Additionally, government data revealed a 43% surge in suspected fraud related to COVID-19 emergency loans, reaching £1.69 billion ($2.11 billion).

GBP

Sterling has recovered slightly this morning, after having tracked a sliding Euro yesterday in the context of a broad Dollar strengthening. The ECB meeting likely added to the dovish repricing in the Pound that we have observed throughout the week – 34bps are now priced into a BoE rate peak, down from a near 75bps from only a month ago. An increasingly widening growth outlook versus the US added to the downward pressure, as US consumer resilience impressed once again. Only consumer inflation expectations are to come on the macro diary today, with the Dollar leg of GBP/USD likely to dominate until UK CPI data next Wednesday.

EUR

The Euro steadied overnight following a slump to a multi-month trough catalysed by the ECB’s dovish 25bps hike. Now at 4%, the press release reiterated data dependence and a determination to reduce inflation, but struck an unexpectedly dovish tone that strongly hinted at a peak in the cycle. According to the central bank:

“Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”

Monetary policy is said to be transmitting effectively at its current level, dampening credit demand and cooling a resilient labour market. Whilst Lagarde tried valiantly to rein in speculation about policy loosening, the markets interpreted the rhetoric as a clear sign of a peak, sending Eurozone yields tumbling along with its common currency. A first 25bps rate cut is already priced in for June. This was further compounded by a downwards revision to growth, with the euro area economy expected to expand by only 0.7% in 2023. The data diary today includes Eurozone trade balance and a further speech from the ECB President.

USD

The US Dollar corrected slightly overnight following another stellar rise yesterday, driven by Euro weakness and consensus-beating macroeconomic data. Retail sales were boosted by higher gasoline prices, increasing 0.6% to last month versus a 0.1% forecast. Headline Producer Price Index inflation also beat expectations at 0.7% month-on-month, and unemployment claims were slightly lower than forecast. A simultaneous dovish Euro tilt sent the Dollar surging to another six-month high, as the US yield advantage and growth differential expanded again. The Dollar rally is seemingly yet to run out of steam, and with rate cuts coming into view for Europe, a significant turn in the macro data will likely be required to reverse the rally. In another data-heavy day, we can expect to see broad Dollar strength tested by import prices, industrial production, consumer sentiment, and inflation expectations.

Markets

European stock futures are poised to rise, tracking the gains seen in Asian markets. This surge comes on the heels of positive Chinese economic data that exceeded expectations, coupled with additional measures by the central bank to bolster the struggling economy. European equity futures have climbed 0.7%, mirroring the rally in Asian shares, driven by robust Chinese industrial production and retail sales figures, reinforcing the impact of earlier stimulus efforts. The UK’s FTSE 100 reached a six-week high on Thursday, spurred by the European Central Bank’s signal of a halt to its monetary tightening, while a spike in iron ore prices propelled industrial metal miners to the forefront of gains.

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

8:45 a.m.: France Aug. CPI
9:00 a.m.: Spain 2Q Labour Costs
10:00 a.m.: Italy Aug. CPI
10:00 a.m.: Poland Aug. CPI
10:30 a.m.: UK BOE/Ipsos Aug. Inflation Next 12 Months
11:00 a.m.: Euro-area July Trade Balance
11:45 a.m.: ECB’s Lagarde speaks
12:30 p.m.: Russia Monetary Policy
2:30 p.m.: US Aug. Import Price Index, Sept. Empire Manufacturing
3:15 p.m.: US Aug. Industrial Production
4:00 p.m.: US Sept. P University of Michigan Sentiment

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