Waller, Waller, Waller, huh!

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Thanim Islam
  • Yields slump on Waller comments
  • German inflation and US GDP out today
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USD weakness continued into the close of European trading as the markets put their sights on Fed Wallers ‘dovish’ comments, that he was “increasingly confident” that the Fed policy rate is high enough to bring inflation back down to 2%, i.e. no more rate hikes. US treasury yields fell to fresh 2-month lows, taking GBPUSD and EURUSD also to fresh two-month highs. In a market fuelled by hope of rate cuts, perhaps it's not surprising that markets ignored the hawkish comments by fellow Fed member Michelle Bowman, stating the risk of additional rate hikes if the battle against inflation stalls.

GBP was the overperformer yesterday in markets, as the number of rate hikes the BoE expects to make over 2024 is fewer than the ECB or Fed have planned.


Market rates

* Daily move - against G10 rates at 7:30am, 29.11.23

** Indicative rates - interbank rates at 7:30am, 29.11.23

Table - 2023-11-29T085613.356

Data points

Table - 2023-11-29T085600.811


  • GBP: BoE Bailey, Hauser

Our thoughts

The weakness of USD on hopes of rate cuts next year continues to be the narrative that moves FX markets, as exemplified in yesterday's moves after the markets focused on Waller's dovish comments instead of Bowman's hawkish comments. Both GBPUSD and EURUSD are once again at overbought levels, suggesting a very stretched move from the lows seen at the start of the month. So what could stop the USD rout? Perhaps the Fed’s preferred measure of inflation, the core PCE index number on Thursday. Markets are expecting this inflation number to show prices dropped from 3.7% to 3.5%, so any upside surprise will likely dent hopes of rate cuts and reinvigorate demand for USD.

For today, focus falls on Germany's inflation numbers, as well as second estimates of US GDP for Q3 as well and the core PCE index numbers for Q3. Spanish inflation numbers came in lower this morning, adding to rate cut bets by the ECB. The EUR is lower to start the morning.

Chart of the day

Fed Waller added to the month-long damage to USD with his ‘dovish’ comments yesterday, that he was “increasingly confident” that the Fed had done enough to bring inflation lower. 10-year treasury yields now sit at 4.28% from the recent highs of near 5%, taking the USD index to August lows. Core PCE numbers tomorrow will be one of the key factors in coming weeks to see if markets are right in pricing in over 100 bps worth of rate cuts by the Fed next year.

29112023 cotd
Source: Bloomberg Finance L.P.

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