ADP payrolls from US came in higher than expected, showing 164,000 jobs were added in December, surpassing an expected 125,000 job additions. As a result the amount of rate cuts expected by the ECB, Fed, and BoE were all reduced. Services PMI numbers across the board were all revised higher as well, notably with activity in the UK and US continuing to shower further expansion. Activity in Europe remains in contraction. Inflation in Germany and France both rose in line with expectations. Overall FX moves were rather muted with the only notable move being weakness on JPY.
* Daily move - against G10 rates at 7:30am, 05.01.24
** Indicative rates - interbank rates at 7:30am, 05.01.24
Big day from Europe and the US today. EU inflation is expected to rise to 3% in December, but core inflation is expected to ease further to 3.4%. Core is the key number and will be the key number in determining how markets project rate expectations for this year. A lower core number and expect markets to continue to pare the amount of rate cuts expected this year, which will benefit the EUR. But as ever, today’s job numbers will take precedence in determining the rate cut narrative. Markets are expecting an addition of 175,000 jobs in December, average hourly earnings to drop to 3.9%, and the unemployment rate to rise to 3.8% - so mostly pointing towards a slowing job market. A big upside surprise and expect USD to continue its gains, plus we could well see the USD index breach its November downtrend channel. GBPUSD and EURUSD will also break its recent uptrend as well. Worth noting that option markets were a buzz yesterday on news of a large bearish bet on US treasuries – so the trader is betting on a higher jobs number today. Will be interesting to see how today plays out.
All eyes on USD and that jobs number today. As mentioned above there is a big chance of options markets betting on a strong number, and 10-year treasury yields hitting 4.2% by the close of play. Should this be the case then expect the USD index to break its downtrend, and a test of the highs seen in December.
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