FX markets were pretty quiet in the absence of any major data but there was plenty of action politically in the UK following the firing of Suella Braverman as Home Secretary, with James Cleverly now taking the role. Most surprising was the return of David Cameron to the Conservative Party now taking the role of Foreign Secretary following his departure back in 2016 after the Brexit Referendum.
GBP was up overall, but part of the demand for GBP seems likely a continuation of the higher risk appetite on Friday evening.
US treasury yields hit the highest in November, but the gains were short-lived ahead of today's inflation numbers. We also saw a spike in JPY on speculation that the Bank of Japan may well be looking at intervening in the FX market but gains on the currency were pared very quickly.
Data this morning showed that UK weekly wages came in higher than expected at 7.9% versus a drop to 7.3% from 8.1% in the three months up to September. Employment rose by 54,000 in that same period with the unemployment rate remaining at 4.2%. GBP up on the morning.
* Daily move - against G10 rates at 7:30am, 14.11.23
** Indicative rates - interbank rates at 7:30am, 14.11.23
Only last week markets took the cue from BoE chief economist Huw Pill that we could well be seeing interest rate cuts from March next year. However, this morning’s figures will unease the Bank of England with wage inflation still prevalent. GBP starting the day stronger and likely to continue ahead of tomorrow morning's inflation numbers – a higher core CPI print tomorrow will likely add to gains for GBP as markets will push back when the first-rate cut will happen next year.
EU GDP out at 10am with expectations the economy contracted in Q3 and later today focus will be the US inflation numbers. Headline inflation is expected to drop to 3.3% from 3.7% considering a drop in energy prices and as ever it’s the core number that will be key. The current battle in the markets is the market's pricing in rate cuts for next year by the Fed versus the Fed continuing to insist on rates staying higher for longer. A higher inflation number today and will support Fed speak, likely to cause a rise in treasury yields and a supporting USD.
Markets and the Fed continue to be at odds with respect to interest rate expectations for 2024 with markets pricing in almost 100 bps worth of rate cuts across next year versus Fed speak continuing to suggest rates will stay higher longer. Today, inflation numbers, at least in the short term, will be key to see who wins the tussle, for now at least and of course which direction the USD takes.
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