consensus

AUD: RBA hike is a 50-50 affair The Reserve Bank of Australia has had a tendency to surprise markets in recent months. As it prepares to announce monetary policy tomorrow, markets (40% implied probability of a hike) and consensus are split between a 25bp rate increase and a hold after a set of contrasting data in Australia. We agree that the chances of a hike are very close to 50-50: 1Q wage data pointed to more tightening in our view, but April jobs figures were dismal. When April CPI data was released last week and surprised with a jump to 6.8% year-on-year, and Governor Philip Lowe sounded open to all options by reiterating data-dependency, the probability of a June hike jumped again.     In theory, data dependency means that the prospect of a “hawkish hold” or “dovish hike” should not be on the spectrum of possibilities, and even though the shades of central bank communication can admittedly be quite varied and creative (Lowe will speak Wednesday morning), we see tomorrow’s risk event as quite binary for the Australian dollar. A hike could see AUD/USD initiate a move that can take it to stabilise around 0.6700 towards the end of this week; a hold raises the risk of sub-0.6500 lows being tested again soon, even though we think less USD strength can favour stabilisation in the pair regardless of a hawkish surprise by the RBA.

Rates Spark: Inflation in focus before central bank meetings US inflation will affect the odds of a June Fed hike but should not move longer-dated rates much. A week heavy in supply promises more volatility but we expect curve flattening to persist into the Fed and ECB meetings.   Rolling the inflation dice once again A higher than expected US core inflation print is the last event that could boost the odds of a 25bp hike at tomorrow’s Fed meeting. Currently, these stand at just under 30%, reflecting the importance of, and uncertainty associated with, today’s CPI release. Currently, consensus stands at 0.4% MoM for the core reading, more than twice the rate needed for inflation to go back to the Fed’s 2% annual inflation target. Still, the less than 50% probability assigned by the curve to a 25bp June hike suggests markets collectively think that the Fed will be happy enough with 0.4% monthly core inflation to refrain from hiking.   One reason, we think, is the over-reliance on economic consensus to assess market moves. The second reason is that, even without a June hike, the Fed has dropped some heavy hints that it could hike in July regardless of its decision in June. For rates markets, this means that even if the Fed ‘skips’ the June meeting, odds of a 25bp hike by July, currently standing at around 80%, may not fall much.   The upshot for traded interest rates, such as swaps and US Treasury yields, is that the market reassessing June hike odds lower will not necessarily mean a drop in longer-dated rates. In fact, investors may well draw the logical conclusion that 0.4% core inflation would reinforce the case for a higher Fed dot plot and hawkish tone, regardless of what consensus is for today’s core inflation print.   What is sure is that price action today, and later this week into the Fed and European Central Bank meetings, is set to be choppy. In addition to the US CPI print, there is a heavy supply slate from sovereign issuers on both sides of the Atlantic. This tends to pressure yields higher into the supply and lower afterwards. In addition to, justified in our view, expectations of hawkish ECB and Fed tones, this skews yields higher. Whether this impacts the front-end or long-end the most depends on appetite to absorb this supply but the current market regime suggests that short-dated rates, ie the section most sensitive to central bank policy rates, is in the lead. This means a tendency to flatten when rates rise.     Curve flattening extends on the back of more hawkish central bank reaction functions   Today's events and market view A strong raft of UK employment data is likely to keep upward pressure on sterling front-end rates today although these have already priced more than 100bp of additional hikes as of yesterday's close. Faster wage and employment growth will probably be discussed by new MPC member Megan Greene today. Other Bank of England testimonies include that of governor Andrew Bailey. Today’s Eurozone inflation numbers are final reads and therefore less likely to surprise at the headline level. It will still be interesting to parse through the inflation components for signs of narrowing or broadening inflation pressure. Germany’s Zew survey will be an opportunity to get a (very) early read on June sentiment indicators. Consensus is for a decline as, we think, actually economic data and China’s reopening, are not living up to expectations. Italy is back on primary markets with auctions in the 3Y/7Y/30Y sectors, adding to auctions from the UK (10Y), Germany (5Y), and Finland (10Y/13Y). Later in the day, the US Treasury will auction 30Y T-bonds. Germany also mandated banks for the launch of a 30Y green bond which should take place today. The US release calendar kicks off early with the national federation of independent business’ optimism indicator. The main event, however, with be the publication of the May CPI report. Consensus is for the monthly core inflation print to remain at an elevated 0.4% but most seem to think this will be enough for the Fed to refrain from hiking at this week’s meeting.

Unlike previous instances of hawkish re-pricing, the rise in front-end rates has struggled to propagate to longer maturities. The resulting curve flattening means the UK curve is fast catching up to the inverted levels of its US equivalent. The limited level of inversion has long been a puzzle to us, given UK policy rates are already significantly in restrictive territory, and as the UK is facing similar growth headwinds to its developed market peers, thus justifying commensurate rate cut expectations.   One possible reason for the lack of flattening was fears that active quantitative tightening – outright gilt sales – were putting comparative steepening pressure on the curve. Another potential explanation could also have been expectations that, once at their peak, policy rates would need to be held there for longer. We have more sympathy for the former explanation, especially now that more inflationary data is finally resulting in curve flattening.   The upshot is a more inverted curve in the UK for longer than in the US in particular, where we can point to (a) more progress against the Fed’s inflation target and (b) a clearer list of catalysts for inflation to revert to target.   Sterling rates now price higher rates for longer at the Bank of England than at the Fed   Today's events and market view The European releases calendar is thin with only eurozone industrial production expected to rebound in April from a dismal print in March. Bond supply mostly consists in Germany adding a 10Y auction to an already busy week on the supply front (it launched a new 30Y green bond as well as auctioned 5Y debt yesterday).   The June FOMC meeting looms large on today’s markets. Consensus (6 out of 108 respondents favour no change in Bloomberg’s survey) and market expectations (a 25bp hike is priced with a less than 10% probability) are for no change in rate at this meeting after the May CPI report came in roughly in line with estimates yesterday. The lack of rate action will likely be offset by a more hawkish tone, including confirmation that a July hike is possible.   Ahead of the Fed, the US release calendar features PPI, which is expected to continue showing deflationary forces at play.

EUR: No easy task for Lagarde today It’s European Central Bank decision day, and our call for a 25bp rate hike is fully in line with consensus and market expectations. In our ECB Cheat Sheet, we outline four different scenarios along with implications for EUR rates and EUR/USD: in our base case, today’s rate increase will be paired with an attempt to convey a hawkish tone and leave the door open for more tightening ahead. Markets are almost fully pricing in another hike in July, and the focus will primarily be on President Christine Lagarde’s press conference and whether she will offer hints that the Governing Council is leaning in favour of a July move. Staff projections will also be released but may not gather too much attention or drive much of the market reaction.   Given the market's strong conviction about another 25bp hike in July (or September at the latest), the bar for a hawkish surprise is probably set quite high today. The ECB may need to signal several more hikes to trigger a significant jump in the euro and that does not look very likely considering the recent signs of decelerating inflation and deteriorating growth outlook. In other words, there is still the interest for the ECB to sound hawkish today, but we suspect that might not be enough to send the euro higher, and we see some moderate downside risks for EUR/USD today. We could see EUR/USD drop back to the 1.0750 handle today, although developments on the US data side will continue to drive the large majority of trends in the pair moving ahead, with ECB policy playing second fiddle, in our view.

Poland: Solid wage growth in May while labour demand improves In May, average wages in the enterprise sector rose by 12.2% year-on-year, up from 12.1% in April. Double-digit wage growth should continue until 2025, allowing real wages to finally grow in mid-2023, after nearly a year of declines. Wages came close to expectations (consensus: 12.6% YoY). According to the release by the Central Statistical Office of Poland, the decline in average wages in May relative to April 2023 was due to a smaller scale of additional payments. Average employment in the enterprise sector increased by 0.4% YoY in May, in line with the consensus, following an increase of 0.5% YoY in the previous month.   Despite signs of a slowdown in many areas of the economy, the condition of the labour market remains robust. On the one hand, workers' wage expectations are driven by, among other things, high minimum wage increases, inflation, and persistent labour shortages in many sectors of the economy. On the other hand, companies' willingness to raise wages can be seen in surveys, such as the one recently conducted by the National Bank of Poland (text in Polish). Together with the high minimum wage hike in 2024, this suggests that wage growth will continue at double-digit levels until 2025. From the middle of this year, with inflation slowing down, wages should rise again in real terms, after almost a year of declines.   Labour demand, on the other hand, appears to be improving after some signs of weakness at the end of the first quarter. This is particularly evident in manufacturing, where employment fell continuously from May 2022 to March 2023. The construction sector is also doing better, which we link to the finalisation of projects financed by the "old" EU budget. In our view, the relatively low annual growth rate primarily reflects constraints of the labour supply.

Poland: Further declines in industrial activity and PPI Industrial production fell by 3.2% in May for the fourth consecutive month. Producer price growth slowed to 3.1% year-on-year from 6.2% YoY a month earlier. Ongoing disinflation may allow for symbolic policy easing by the National Bank of Poland this autumn. The drop in industrial production of 3.2%YoY came close to expectations (consensus: -3.0% YoY), following a 6.0% YoY decline in April (revised). This was the fourth consecutive month of year-on-year production decline. Adjusted for seasonal factors, production fell by 1.0% month-on-month, contracting for the third consecutive month. Manufacturing output fell by 2.7% YoY. We also saw declines in mining (11.2% YoY), power generation (6.5% YoY), as well as water supply and waste management (2.4% YoY).   Among the manufacturing divisions, the deepest year-on-year declines were seen in the production of wood products (22.5%) and chemicals (20.7%). By contrast, the largest increases were seen in the repair, maintenance and installation of machinery and equipment (36.2%), the manufacture of electrical equipment – including automotive batteries – (14.5%) and the manufacture of vehicles (11.7%).   The slightly slower-than-April year-on-year decline in industrial production was due to a more favourable calendar pattern, among other factors. May's manufacturing PMI report also suggested a slight improvement in new orders and current production, but a continued decline in seasonally adjusted month-on-month production remains concerning. We expect that the year-on-year decline in production will continue over the coming months. A positive sign is the increase in the production of capital goods (9.1% YoY), suggesting continued investment growth.   Producer price growth (PPI) slowed in April to 3.1% YoY (ING: 4.7%; consensus: 4.6%) from 6.2% YoY a month earlier (revised data). Compared to April, prices declined in all sections except water supply and waste management. This is the fourth consecutive month that the PPI index declined in month-on-month terms, and prices in manufacturing have been falling since November. On a year-on-year basis, declines in processing prices (1.7%) are being supported by a significant discount in the coke and refined petroleum products manufacturing division (30.5%). Prices in mining (15.5%) and energy production (37.0%) are still markedly higher than a year ago.   Producer prices remain on a clear disinflationary path, and the Monetary Policy Council expects CPI inflation to fall further as well. Recent statements by National Bank of Poland President Adam Glapinski indicate that the drop in CPI inflation to single-digit levels in September, which we expect, could result in a rate cut this autumn. This will not yet be the start of a full easing cycle, which we expect only in the fourth quarter of 2024. We see a number of inflation risks in the medium term, highlighted by central bankers in core markets maintaining a restrictive monetary policy stance.

Falling retail sales in Poland confirm consumption weakness in the second quarter Retail sales fell by 6.8% year-on-year in May, pointing to continued weakness in household consumption in the second quarter. Price pressure is abating in the short run, but mid-term upside risks remain substantial due to the tight labour market, buoyant wage growth and expansionary fiscal policy. More decisive monetary easing is expected in late 2024. Retail sales fell by 6.8% year-on-year in May (ING and consensus: -5.7%), following a 7.3% year-on-year decline in April. Seasonally adjusted sales fell by 1.1% month-on-month, after rising at the same rate a month earlier. Weakness in consumption will facilitate disinflation in the short term, while medium-term trends are more uncertain. The decline in sales was broad-based. In real terms, sales declined in all categories. Durable goods fell at a double-digit rate: furniture, consumer electronics, and household appliances saw declines of -14.8% YoY, while newspapers and books fell by -15.2% YoY. The exception was car sales (-2.7% YoY), where deliveries of pre-ordered cars that were delayed due to supply chain disruptions and processor shortages were most likely still taking place. On the other hand, a positive sign is a decline in the implied retail sales deflator to single-digit levels. The deceleration of inflation amid sustained double-digit growth in nominal wages should promote a gradual improvement in real household incomes and, consequently, a recovery in private consumption, but the process is slow. At the moment, everything indicates that the second quarter of this year was the third consecutive quarter of declining household consumption, and we should expect increases only in the second half of the year.   Real disposable income of households will continue to recover   Weakness in consumption will promote disinflation in the short term, while medium-term trends are uncertain. Against the backdrop of a tight labour market, high wage growth, minimum wage hikes, and expansionary monetary policy, it will be increasingly difficult for inflation to continue to fall after reaching high single-digit levels. As a result, the prospect of inflation returning to the NBP's target remains distant, and this means that the elevated level of interest rates will remain for longer. At the same time, the Monetary Policy Council has expressed a willingness to cut rates later this year in the event of single-digit inflation in September and the prospect of further declines. In our view, this would be a one-off move, and the full monetary easing cycle will not begin until the fourth quarter of next year.

The Bank of England accelerated its tightening efforts after meeting this week, hiking rates by 0.5% in response to another raft of worrying inflation data.  And it's not just yesterday's CPI data that will have caused considerable discomfort for the MPC, the April figures were also far too high and wage numbers we've had in the interim suggest its becoming increasingly embedded. That had to have caused serious alarm within the BoE, within seven members of the committee anyway. Two policymakers voted to hold rates steady for the fourth meeting highlighting the widening gulf between the views on the MPC which may make finding a consensus going forward that much more challenging.  There's every chance that those backing 50 basis points did so in the hope that doing more now may necessitate the need to do less later on and for a shorter period of time. That's not how markets are initially perceiving it though, with the odds of Bank Rate rising above 6% increasing. It could get rather painful in inflation doesn't improve soon. The pound appears to be weighing up both of these considerations, as is evident in the very volatile response we've seen in the currency. Rate hikes are generally good for a currency but when they're rising to levels that could seriously threaten the economy, there's certainly an argument for the opposite to happen.     Turkish interest rates finally heading in the right direction  Another interest rate decision was announced alongside the BoE, with the CBRT reverting back to hiking interest rates aggressively in order to put a lid on inflation and steady the currency which has fallen another 15% in recent weeks.   President Erdogan won the election promising to defend lower interest rates having led a campaign of aggressive rate cuts under Governor Åžahap KavcıoÄŸlu, before immediately replacing him and the finance minister after the vote. A rate hike today was widely expected but the range of forecasts was vast and if anything, the 6.5% hike was at the lower end of the range.  Turkey faces many problems going forward as a result of the misguided policies over the last couple of years and that will likely warrant more aggressive tightening in the future. For now, investors may be mildly relieved that rates are heading in the right direction, if not fast enough. The risk is that Erdogan hasn't really hesitated to sack Governors that raise rates in the past so investors will never feel fully at ease as long as he's President.

Eurozone and German PMIs weakened in June EUR/USD fell as much as 110 pips on Friday EUR/USD has taken a tumble on Friday. In the European session, the euro is trading at 1.0885, down 0.64%. The euro fell as low as 1.0844 earlier in the day. Later today, the US releases ISM Services PMI. The consensus stands at 54.0 for June, following 54.9 in May. The services sector is in solid shape and the ISM Services PMI has posted four straight readings over the 50 level, which separates expansion from contraction.     Eurozone, German PMIs fall in June Eurozone PMIs for June pointed to weaker activity in the services and manufacturing sectors. The Services PMI eased to 52.4, down from 55.1 in May and below the consensus of 54.5 points. The Manufacturing PMI fell to 43.6, down from the May reading of 44.8 which was also the consensus. Germany, the largest economy in the eurozone, showed a similar trend, with Services PMI falling from 54.7 to 54.1 and Manufacturing PMI dropping from 43.5 to 41.0 points. The 50 line separates contraction from expansion. The takeaway from these numbers is that the eurozone economy is cooling down. Business activity is still growing but at a weaker pace, while the manufacturing recession has deepened. The eurozone economy is yet to recover after negative growth in the past two quarters, as the ECB’s aggressive tightening makes its way through the economy. At first glance, the weak PMI readings should be good news for the ECB, which is trying to dampen economic growth in order to wrestle inflation back down to the 2% target. However, inflation remains very high at 6% and further tightening could tip the weak eurozone economy into a recession. The ECB’s efforts to push inflation lower have been made more difficult, as unemployment is at historic lows and wage growth is high. Germany, the bloc’s largest economy, isn’t the power locomotive that it once was and is still in recovery mode. The ECB has signalled that it will hike rates in July and another increase could be coming in September unless inflation decelerates more quickly.  

Canada’s inflation rate eases US Durable Goods Orders accelerate The Canadian dollar spiked and gained 50 points after Canada released the May inflation report but has pared these gains. USD/CAD is unchanged at 1.3158.   Canadian inflation heads lower Canada’s inflation rate fell sharply in May to 3.4%, down from 4.4% in April. As expected, much of that decline was due to lower gasoline prices. Still, this is the lowest inflation rate since June 2021.The core rate, which is comprised of three indicators, fell to an average of 3.8% in May, down from 4.2% a month earlier. The decline should please policy makers at the Bank of Canada, as inflation slowly but surely moves closer to the 2% target. The BoC cited the surprise upswing in inflation in April as one reason for its decision to hike rates earlier this month. With headline and core inflation falling in May, will that be enough to prevent another rate increase in July? Not so fast. The BoC has said its rate decisions will be data-dependent, and there is the GDP on Friday and employment next week, both of which will factor in the rate decision. The US released a host of releases today, giving the markets plenty to digest. Durable Goods Orders jumped 1.7% in June, up from an upwardly revised 1.2% in May and crushing the consensus of -1%. The core rate rebounded with a 0.6% gain, up from -0.6% and above the consensus of -0.1%. Later today, the US publishes the Conference Board Consumer Confidence and New Home Sales. Wednesday is a light day on the data calendar, with the Fed will in the spotlight. Fed Chair Jerome Powell will participate in a “policy panel” at the ECB Banking Forum in Sintra, Portugal, and investors will be looking for some insights into Fed rate policy. As well, the Fed releases its annual “stress tests” for major lenders, which assess the ability of lenders to survive a severe economic crisis. The stress tests will attract more attention than in previous years, due to the recent banking crisis which saw Silicon Valley Bank and two other banks collapse.   USD/CAD Technical There is resistance at 1.3197 and 1.3254 1.3123 and 1.3066 are providing support  

Australia posts strong trade surplus US ADP employment surprises with massive gain US unemployment claims and ISM Services PMI will be released later on Thursday Thursday has been a busy day for AUD/USD. The Australian dollar rose after a strong Australian trade balance report but has reversed directions following a sparking US ADP employment release. In the North American session, AUD/USD is trading at 0.6639, down 0.20%.   Australia’s trade surplus widens Australia continues to post monthly trade surpluses, supported by exports of iron ore and natural gas to Asian Pacific countries. China’s recovery has been uneven but there has still been an increased demand for iron ore and coal from Australia. The June trade surplus was A$11.8 billion, above the consensus of A$10.9 billion. The Australian dollar gained ground on the strong trade surplus, only to give up all these gains after the US ADP employment report posted a massive gain of 497,000 in June, up from 267,000 in May and well above the consensus of 228,000. The ADP report is not considered a reliable indicator for Friday’s nonfarm payrolls release, but investors still keep an eye on it and the huge gain has boosted the US dollar against the major currencies. US nonfarm payrolls are expected to move in the opposite direction of the ADP report, with a consensus of 225,000 in June, down sharply from 339,000 in May. Later on Thursday, the US releases unemployment claims and the ISM Services PMI. Unemployment claims dropped sharply to 239,000 in the previous release and are expected to rise to 245,000. The ISM Services PMI has shown weak expansion in recent months, with readings slightly above the 50.0 level, which separates expansion from contraction. The June consensus stands at 51.0, slightly higher than the May reading of 50.3 points. . AUD/USD Technical AUD/USD continues to test resistance at 0.6659. This is followed by resistance at 0.6722 0.6597 and 0.6534 are providing support

CAD: Jobs numbers in focus ahead of BoC meeting Jobs figures will be released in Canada too this afternoon, in what will be the last major data release before next Wednesday’s Bank of Canada meeting. Back in May, jobs figures surprised on the downside, with a 17k drop in hiring, adding doubts to whether the Bank of Canada (BoC) would deliver a back-to-back rate hike in July. Today, the consensus is expecting a robust headline number (20k), despite a marginal tick-up in unemployment to 5.3%. We are still inclined to think a print-around consensus should be enough to convince the BoC to hike next week, which is around 60% priced in, suggesting some upside risks for CAD (mostly in the crosses, given our view for a USD rebound in the near term).

CAD: We expect a BoC hike today The Bank of Canada surprised markets with a hike in June, and our base case is that policymakers will follow up with another 25bp increase today. As discussed in our preview, the data flow since the June meeting has not pointed unequivocally in the direction of more tightening, but the latest jobs report continued to point to a tight jobs market and we see a higher chance that the BoC will favour two back-to-back hikes after a five-month pause. The consensus has been split lately but has leaned more in favour of a hike in the past few days. Markets price in around 17bp ahead of today’s announcement. There is undoubtedly some upside potential for CAD today in our baseline scenario, especially because the BoC may see the advantage in attaching a dovish statement to a hike, so closing the door to further tightening if needed. USD/CAD could be eyeing the 1.3120 late-June lows, and we like the loonie even more against other procyclical currencies like the Australian dollar or the Swedish krona. 

CAD: We expect a BoC hike today The Bank of Canada surprised markets with a hike in June, and our base case is that policymakers will follow up with another 25bp increase today. As discussed in our preview, the data flow since the June meeting has not pointed unequivocally in the direction of more tightening, but the latest jobs report continued to point to a tight jobs market and we see a higher chance that the BoC will favour two back-to-back hikes after a five-month pause. The consensus has been split lately but has leaned more in favour of a hike in the past few days. Markets price in around 17bp ahead of today’s announcement. There is undoubtedly some upside potential for CAD today in our baseline scenario, especially because the BoC may see the advantage in attaching a dovish statement to a hike, so closing the door to further tightening if needed. USD/CAD could be eyeing the 1.3120 late-June lows, and we like the loonie even more against other procyclical currencies like the Australian dollar or the Swedish krona. 

FX Daily: Attention turns to Turkey Ahead of tomorrow's main event of the week – speeches at the Fed's Jackson Hole symposium – attention today will turn to Turkey. In focus will be whether the Central Bank of Turkey accelerates its policy tightening in a return to a more orthodox policy. Consensus suggests probably not. Elsewhere, the dollar should remain steady, with jobs in focus.   USD: Focus on the jobs market The dollar and US yields were knocked off their highs yesterday as an annual benchmark revision (up to March 2023) deducted 306,000 from the reported US payroll growth figures. Several expectations had in fact looked for a 500,000 reduction. The market reaction (a 10bp drop in the US yield curve) looked a little exaggerated but perhaps proves a reminder that the employment story is the most important US variable right now. In other words, US disinflation is welcome, but if the unemployment rate remains at its lows and consumption stays strong, inflation may never make it back to 2% on a sustainable basis.    For that reason, look out for the weekly initial jobless claims data today, where any tick higher to the 250,000 area could slightly weigh on US yields and the dollar. We would not expect big moves, however, before Federal Reserve Chair Jerome Powell's 1605CET speech tomorrow at the Fed's Jackson Hole symposium. Given that the risk environment is a little better bid today – with Nvidia's results keeping the tech boom alive – DXY could trade slightly offered in a 103.15 to 103.50 range.

JPY: Tokyo inflation slows Inflation figures for Tokyo were released overnight, showing a deceleration in price pressures which were in line with the Bank of Japan estimates and slightly below consensus. Inflation in the capital moved below the 3% mark in August for the first time since September 2022, essentially endorsing the BoJ’s reluctance to scale back monetary easing. USD/JPY has risen steadily in line with rebounding US treasury yields since yesterday’s early session when it touched a 144.50 low. We think that a hawkish tone by Powell is largely priced in today, but should be enough to keep USD/JPY around 146.00 for today.

ECB cheat sheet: Is a hike hawkish enough? Markets are torn. Will the ECB hike this week or not? We think it will, but we look at how different scenarios can impact rates and FX. Even in our base case, we suspect that convincing markets that this is not the peak will be very hard, and dovish dissenters may get in the way. The upside for EUR rates and the euro may not be that big and above all, quite short-lived.       As discussed in our economics team’s European Central Bank meeting preview, we narrowly favour a rate hike this week. The consensus of economists is slightly tilted towards a hold, and markets also see a greater chance of no change (60%). In the chart above, we analyse four different scenarios, including our base case, and the projected impact on EUR/USD and 10-year bunds. We expect to see a more fragmented than usual Governing Council at this meeting. Whichever direction the ECB decides to take, the debate will likely be fiercer than in previous meetings, as lingering core inflationary pressure is being counterbalanced by evidence of rapidly worsening economic conditions in the euro area. Accordingly, expect the overall messaging by the ECB to be influenced not only by the written communication but also by: a) how much President Christine Lagarde manages to conceal growing division and disharmony within the Governing Council during the press conference and; b) any post-meeting “leaks” to the media, which could be used by dissenters to influence the market impact.        

Eurozone, German Service PMI ease in December Euro snaps four-day rally The euro has snapped a four-day winning streak on Friday. In the European session, EUR/USD is trading at 1.0949, down 0.38%. The euro has enjoyed a strong week, with gains of 1.77%. Soft Eurozone, German services PMIs weigh on euro Eurozone Services PMI eased in December, indicating that the economy continues to struggle. The PMI fell from 48.7 to 48.1 and missed the consensus estimate of 49.0. This marked a fifth straight month of contraction in the services sector, with 50 separating contraction from expansion. Germany, the largest economy in the eurozone, also reported a decline, with the PMI falling to 48.4, down from 49.6 in November and short of the consensus estimate of 49.8. Euro soars after ECB pause The European Central Bank held the benchmark rate at 4.0% for a second straight time on Thursday. This move was expected, but the central bank pushed back against market expectations for interest rate cuts next year, sending the euro soaring 1.09% against the US dollar after the announcement. ECB President Christine Lagarde reaffirmed that the Bank would continue its “higher for longer” stance, saying that the Bank was not about to let down its guard and lower rates. Lagarde sounded hawkish even though the ECB lowered its inflation forecast at the meeting. Inflation has fallen to 2.4% in the eurozone, within striking distance of the 2% target. Lagarde acknowledged that inflation was easing but said that domestic inflation was “not budging”, largely due to wage growth.   There is a deep disconnect between the markets and the ECB with regard to rate policy. ECB President Lagarde poured cold water on expectations for rate cuts, arguing that inflation had not been beaten. The markets are marching to a very different tune and have priced in at least in around six rate cuts in 2024 and are confident that Lagarde will have to change her stance, with inflation falling and the eurozone economy likely in recession. . EUR/USD Technical EUR/USD is testing support at 1.0957. Below, there is support at 1.0905 1.1044 and 1.1096 are the next resistance lines    

FX Daily: A dollar rally to start the New Year The dollar jumped yesterday as investors started to return from the long Christmas break. Markets are unwinding some dovish bets, and questioning stretched equity valuations, ultimately favouring defensive bets in FX. The dollar also tends to seasonally outperform at the start of the year. Today, the focus moves back to data, as well as the FOMC minutes.   USD: Dollar seasonally strong in January and February Defensive bets dominated in global markets as investors returned from the long Christmas break. This was particularly evident in the FX market, as the dollar corrected sharply higher yesterday to the detriment of European currencies. The tendency of dollar selling and European FX buying that emerged in December was triggered by the dovish pivot at the December FOMC, but seasonal factors also played a role. The dollar tends to underperform at the end of the year, likely due to some tax-related flows from US corporations: DXY weakened in December in each of the past seven years. While the seasonality factor isn’t as strong, January tends to be a good month for the dollar, with DXY having risen on average 0.4% in the past 20 years. February has shown a stronger positive seasonality pattern, with DXY having appreciated in each of the past seven years. The dollar strength in the early part of the year is often associated with the December tax flows by US corporates being reverted, and while expectations of a firmer dollar at the start of the year (which we agree with) could have exacerbated yesterday’s USD buying, the key factor remains Federal Reserve dovish bets against the backdrop of stretched equity valuations after a strong year for US stocks, in particular in the tech sector. We have observed some tentative unwinding of dovish bets as trading resumed: interestingly, the Fed Funds futures curve no longer fully prices in a March cut (21bp at the moment). As trading volumes pick back up this week, US calendar events will also offer direction to investors. Today, the Fed releases the minutes of the December FOMC, which should shed some light on the reasoning behind the dovish revision of the Dot Plot. Given the strong dovish reception by the market after the December Fed announcement, there is a risk of the minutes preventing further dovish bets as some conditionality (in terms of economic data developments) for easing policy emerges in the minutes. Today also sees the release of JOLTS job openings for November and the December ISM manufacturing, and consensus is positioned for a good print in both releases. We are inclined to think that the dollar can hold on to most of yesterday’s gains in the next couple of days, as data may prove benign and investors favour defensive positions ahead of Friday’s US payrolls – which are expected to print a respectable 170k. DXY may hover around the 102 gauge into the payrolls. Beyond the very short term, we still expect a further dollar decline to materialise this year as the deterioration in the economic outlook forces large Fed cuts, but the pace of USD depreciation should be more moderate in 1H24 compared to November/December 2023.  

FX Daily: Not too hot to handle Rate expectations were not moved by slightly hotter-than-expected US CPI, and support for the dollar has mostly come through the risk-sentiment channel. Range-bound trading may persist despite conditions for a stronger dollar. Inflation in the CEE region is falling; the NBR leaves rates unchanged.   USD: Markets still attached to March cut US CPI data came in a bit hotter than expected yesterday, with the core rate rising 0.3% MoM and slowing to 3.9% YoY versus 3.8% consensus. The upside surprise in headline inflation was bigger: an acceleration from 3.1% to 3.4% YoY versus the 3.2% consensus. The dollar jumped after the release, also thanks to weekly jobless claims printing lower than expected. Somewhat surprisingly, the US yield curve did not react by scaling back rate cut expectations, as a knee-jerk selloff in 2-year Treasuries was fully unwound within an hour of the CPI release. We've already discussed how we did not expect this inflation read to leave a long-lasting impact on markets, and it definitely appears that most of the fixed-income investor community is almost overlooking the release. The support to the dollar appears mostly tied to the negative response in equities, given the neutral impact on short-dated US yields. A March rate cut is still over 60% priced in, and we still see short-term vulnerability for risk assets from a hawkish repricing. The conditions for a higher dollar this month are surely there, but we have observed numerous indications that markets remain reluctant to make short-term USD bullish positions coexist with the longer-lasting view that US rates will take the dollar structurally lower by year-end. The chances of rangebound trading until we receive clearer messages by activity data and the Fed are high. Today, PPI figures for December will be released, adding information about lingering price pressures and potentially steering the market a bit more. On the Fed front, we’ll hear from hawk Neel Kashakari.

EUR: Rejected at 1.1000 Yesterday, EUR/USD was rejected at the 1.1000 key resistance level, and in line with our dollar view, we now expect some more days of rangebound trading, with some modest downside risks for EUR/USD. One factor that we wish to keep highlighting, though, is the rather wide potential for the euro to benefit from an unwinding of ECB dovish bets in the coming months. Markets continue to price in 140bp of easing by year-end, while our economics team only forecasts 75bp. We expect to see those benefits to the euro more clearly in pairs such as EUR/CHF in the short term rather than in EUR/USD, at least until a clearer dollar downtrend emerges (in our view, a 2Q story). Other than some final December CPI reads in France and Spain (which shouldn’t move the market), the eurozone calendar is empty today. The next key data input for the euro is the German ZEW on Tuesday. We’ll keep monitoring ECB speakers to make sense of what is the “consensus” degree of rate-cut pushback the bank wants to convey to markets. Today, we’ll hear from Chief Economist Philip Lane. Elsewhere in Europe, Sweden’s Riksbank releases FX sales figures for the week around Christmas today: expect a low number, or even zero, due to low liquidity conditions. In a piece we published this week, we discuss how we expect the end of Riksbank FX sales by early February, hurting SEK in the crosse

FX Daily: Fed cancels the free lunch European FX markets will today be monitoring how US asset markets react to the news that the Fed will not be renewing its Bank Term Funding Program. US regional banks will be in focus here. Elsewhere, the focus will be on what should be a decent 4Q23 US GDP figure and central bank meetings in the eurozone, Norway, Turkey and South Africa.   USD: Let's see how the US regional banks do today FX markets continue in their slightly risk-averse mode, where some of the investors' favourite high-yield currencies - such as the Mexican peso and the Hungarian forint - remain under some pressure.  This is despite global equity markets doing reasonably well. In short, we continue to see a very mixed investment environment and one in which conviction views can be dangerous. Looking ahead today, there are two US themes to focus on. The first is the Federal Reserve's announcement last night that its Bank Term Funding Program (BTFP) would end as scheduled on 11 March. And effective immediately, banks will be charged the rate paid on Fed reserve balances (around 5.40%) rather than the prior one-year USD OIS +10 bp (around 4.88%) to borrow money from the facility. This cancels the free lunch of banks borrowing at the BTFP and parking it at the Fed. The question is how US regional bank equity prices react to this news today. We presume that the Fed has a good handle on this such that these regional banks do not come under stress again. But let's see how this group trades today and whether it ushers in a new, potentially risk-off tone in US markets. The second focus is the 4Q23 US GDP data. We are looking at an above-consensus 2.5% quarter-on-quarter annualised figure. Consensus is now 2.0%. In theory that should be dollar-positive, but not necessarily risk-negative because the price data is far more important to the Fed right now. On that topic, Friday sees the December core PCE deflator (expected at a subdued 02.% month-on-month), while 13 February remains a major day for calendars in the release of the January CPI figure and the 2023 annual CPI revisions. Given also the event risk of the US quarterly refunding on Monday as well as the CPI release on 11 February, we doubt investors will want to commit much capital just yet. Instead, then, we think rangebound trading is the order of the day, with little follow-through should the dollar look particularly bid or offered. 102.75-103.75 looks the near-term DXY range.