USD extended its 2024 rally as markets show signs of rethinking the dovish Fed pivot towards the end of last year. This is telling in the bond markets with J. P. Morgan's latest client survey showing a reduction in participants buying treasuries with selling increasing. As a result treasury yields continue their rise higher, suggesting second thoughts on the amount of rate cuts expected by the Fed this year. On the data front, US numbers were mixed. JOLTS job openings came in lower than expected, indicating the job market continues to weaken, and added to signs that we could be seeing slower wage growth in months ahead. ISM manufacturing numbers came in marginally higher, but the activity in the sector remains in contraction territory.
GBP had its biggest daily gain against the EUR since the 1st December, as the EUR continues to weaken on increased demand for USD. GBP gained broadly amongst its G10 peers.
* Daily move - against G10 rates at 7:30am, 04.01.24
** Indicative rates - interbank rates at 7:30am, 04.01.24
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Last night's Fed meeting was relatively mixed, with a reference to rates needing to be restrictive for some time whilst also acknowledging that rates have peaked and cuts would begin this year. Not much of a game changer, and market action acknowledged this also.
German inflation, ADP payroll report, and US jobless claims will take precedence today, and whether the data supports the recent chatter of whether markets have overdone their bets on the amount of rate cuts this year.
Final PMI numbers for December are also due for release to provide a gauge of economic activity in the respective economies.
This morning we're seeking minor recoveries on risk appetite on the back of the mixed minutes, causing GBPUSD and EURUSD to rise which should provide good opportunity for USD buyers to enter the market, and hedge against the potential for any further easing of rates being priced by markets.
Yesterday saw the biggest rise on GBPEUR since the 1st December as interest rate differentials continue to favour GBP over EUR. The potential for a rate cut in March sees the market putting in a 66.4% chance of a rate cut by the ECB, and a 31.7% chance by the BoE. Lower inflation numbers from the eurozone this week will widen this differential, and could well take GBPEUR back to the December highs. Today we have the German inflation numbers.
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