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The US dollar fell on expectations of rate cuts
The US dollar fell against its major rivals to end Tuesday’s session down by seven-tenths of a per cent against the pound and around 0.5% against the euro. GBP/EUR made marginal gains as markets continued their wait for UK inflation figures.
This morning’s release showed that the headline rate cooled to 3.9% in November 2023 from 4.6% in October. This is the lowest it’s been since September 2021 and well below forecasts of 4.4%. Following the announcement, sterling lost 0.3% against the euro, cancelling out yesterday’s gains.
The eurozone reported inflation of 2.4% at November’s final read, as core inflation sank to 3.6% from 4.2%. Those numbers are in line with forecasts and may add more fuel to the fire of those expecting monetary loosening from the European Central Bank in the first half of next year.
Also starting to feel the heat was the Federal Reserve. US Building permits fell by 2.5% to a seasonally adjusted annual rate of 1.460mn in November 2023, below market expectations of 1.470mn. Jerome Powell can act as hawkish as he likes, but mounting expectations of rate decreases early in 2024 may prove hard to squash.
The Canadian dollar made marginal gains against the US dollar after November’s inflation read came in slightly above expectations at 3.1%, unchanged from the previous month.
While the Bank of Japan’s decision to hold interest rates at negative 0.1% was not exactly a surprise, the Japanese yen fell by around two-thirds of a per cent following the announcement. Policymakers are expected to raise rates back into positive territory early next year as part of their efforts to normalise the country’s price dynamics.
After a flurry of activity this morning, it’s a relatively quiet day on the data front as we look ahead to US GDP figures tomorrow. Friday’s UK retail sales should ensure that currency markets don’t pack their bags for Christmas just yet.
Cargo vessels are beginning to abandon the Red Sea route after ongoing attacks from Houthi militants. AP Møller-Maersk, which operates the world’s second-largest container shipping fleet, became the latest to divert its vessels around Africa amid a rapidly growing threat to commodity routes.
The owners of British supermarket chain Asda have said it faces rapidly rising debt financing costs next year. Answering questions from MPs, Mohsin and Zuber Issa said they may be forced to pay an extra £30mn next year when the fixed interest rate on a portion of its borrowing expires.
The Nasdaq 100 had a stellar day yesterday, as investors in the tech-heavy composite were cheered by the previous Federal Reserve meeting. The S&P 500 also made ground and now stands within 0.9% of its highest level.
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GBP: Christmas cheer
Sterling recorded gains against its rival currencies on Tuesday as markets ramped up bets that stubborn inflation would force the Bank of England to be slower to cut interest rates.
UK consumers have been relatively resilient to rate increases, but a good test of that will come on Friday with the release of retail sales figures. Forecasts predict a pre-Christmas bounce of 0.6%, which would be well up from the -0.3% seen in October.
GBP/USD: the past year
EUR: Boost for German consumer morale
This morning investors heard that the GfK consumer climate indicator for Germany rose to -25 heading into January, from -27.6 in December. This is the highest morale has been since August amid notable rises in income expectations and propensity to buy.
The eurozone has a light schedule for the rest of the week, although there will be a focus on today’s construction output numbers.
USD: From hawks to doves
The US dollar fell against both the pound and the euro in Tuesday’s session.
Markets interpreted last week’s Federal Reserve meeting as a dovish pivot, although Jerome Powell did not seem entirely convinced the battle against inflation was over. There may be some more evidence in this week’s initial jobless claims, but Powell must pick his moment to take flight in 2024.
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