Risk aversion drives USD

Market reports
Thanim Islam
  • Continued geopolitical tensions increase USD demand
  • UK wages fall on signs of easing price pressures

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Rangebound trading continued yesterday despite some hawkish comments from members of the ECB. One comment alluded to the idea that current rate cut expectations are too optimistic, and another suggested that the recent attacks in the Red Sea could cause a second wave of inflation in light of recent rises in oil prices, and the costs of freight containers rising - something that our client base has also been referencing in recent conversations.


Market rates

* Daily move - against G10 rates at 7:30am, 16.01.24

** Indicative rates - interbank rates at 7:30am, 16.01.24

Table - 2024-01-16T084307.609

Data points

Table - 2024-01-16T084310.136


  • USD: Fed Waller
  • GBP: BoE Governor Bailey

Our thoughts

GBP has started the day lower as UK wage growth fell more than expected in the three months to November 2023. Data this morning showed that wage growth slowed to 6.5% which may well bolster the argument that the BoE has done enough to ease inflationary pressures. According to a survey of economists by Bloomberg published this morning, inflation is expected to come close to the BoE’s 2% target by Spring. December’s inflation numbers are due tomorrow with the services element being seen as the key measure to look out for. Expected numbers are: CPI to fall to 3.8%, core CPI to fall to 4.9% and services CPI to fall to 6.1%. Current market expecations see the BoE cutting interest rates in May and remain steady despite. Governor Bailey is speaking this afternoon, and continued repetition of higher rates for longer could cause GBP to recover.

GBP is also not being helped with an underlying theme of risk aversion in markets amid continued tension in the Middle East, after Iran fired missiles at targets in northern Iraq and Syria in what's been described as retaliation for attacks earlier this month on the burial site of General Qassem Soleimani. Treasury yields have risen, equities have dropped, with USD benefitting in the FX space.  Fed Waller is due to speak later at 4pm and we wait to the impact of his comments on rate expectations and thus USD. Waller did pivot to a dovish stance back in December, causing USD to weaken. Further comments to this effect, and this could dampen the USD gains seen overnight.

Only major data point to look out for will be the latest ZEW survey of economic sentiment from Germany and Europe at 10am.

Chart of the day

After being stuck in a sideways trading range for the first few weeks of this year as markets battle with expectations that the Fed will be the first major central bank to cut interest rates despite data suggesting otherwise, USD finally broke out of this sideways move as well breaking out of the November downtrend on risk aversion. Current market sentiment could well favour the greenback further.

16012024 cotd
Source: Bloomberg Finance L.P.

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