Yesterday was very much a risk-off day ahead of key job numbers from the US this week as markets faded. GBP and EUR both were weaker overall with US equities coming off recent highs, and currency flows were preferred into USD.
* Daily move - against G10 rates at 7:30am, 05.12.23
** Indicative rates - interbank rates at 7:30am, 05.12.23
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There continues to be talk in the markets that the November rally in risk assets such as equities, GBP, and EUR is now overstretched alongside the weakness USD, driven by the recent optimism of Fed rate cuts next year. However, there now seems to be contrarian view that the expectation of approximately 1.25% worth of rate cuts next year may be excessive, and this could well be filtering to the FX markets, which could add to USD gains. Today sees the first set of job numbers from the US in the form of JOLTS job openings numbers at 3pm. A higher number would indicate a job market that isn’t weakening, which will likely ease Fed rate cut expectations. Service PMI numbers are also due from Europe, UK, and the US.
The EUR is set to weaken for the fifth consecutive day as rate cut expectations by the ECB next year have increased. ECB Schnabel added to the dovish narrative that rate hikes are unlikely due to the ‘remarkable’ fall in inflation.
Excessive Fed rate cut bets seems to be narrative that has started the month of December, resulting in the USD index testing resistance of the November downtrend. Data over the coming weeks will be key in determining whether rate cut bets are correct or not, with today's PMI numbers and JOLTS job openings.
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