USD: Misplaced growth and geopolitical relief
The USD was sold off on Monday but reversed all of its losses yesterday with the US exceptionalism story seemingly continuing for now. US preliminary PMIs yesterday for October surprised to the upside, with both manufacturing and services coming in the expansion territory. Manufacturing PMI was at 50.0 (prev. 49.8) against the expected 49.5 while services rose to 50.9 from 50.1, despite consensus for a decline to 49.9. Overall, the compose PMI was strong at 51.0 from 50.2 in August and consensus at 50.0. This has brought the expected 2024 terminal rate a notch higher to 4.6% from 4.5% earlier, as higher-for-longer gets more weight. Similar message could come from the advance Q3 GDP data due in the US tomorrow. Consensus expects growth of 4.5% QoQ annualized from 2.1% previously. However, despite the US economic strength sustaining, we remain cautious going into the end of the year given the consumer weakness signalled by credit card debt statistics and rising delinquency rates. Markets are likely to get a misplaced sense of relief from the strong US economic data, and therefore any strength of the US dollar could continue to remain short-lived.
However, on the other hand, market also has a misplaced sense of relief on the geopolitical front with Israel holding off on the ground invasion of Gaza. Oil has seen huge declines this week as the war premium gets erased amid reports that Israel may be reconsidering its ground invasion on humanitarian grounds. However, air strikes continue and risks of a regional escalation still remain. If geopolitical concerns were to widen, we could see a bid again in USD. Likewise carry trades could also keep USD supported, but from a fundamental and yield perspective, strength of the dollar is looking shaky.
Market Takeaway: US economic data could remain strong this week, providing a false sense of relief. USD gains coming from data surprises will likely remain shaky.
EUR: Dismal PMIs and bank lending survey makes ECB dovish surprise likely
While the US PMIs were strong yesterday, there was a broad underperformance in Eurozone PMIs both relative to expectation and relative to the US, breaking any myths of a potential stabilisation. Eurozone composite PMI slipped back to 46.5 from 47.2 with manufacturing staying weak at 43 while services disappointed, slipping back to 47.8 from 48.7 (vs. 48.6 expected). PMI indicators also showed price pressures cooling and job market loosening, suggesting ECB may have a high chance of surprising dovish this week. Bank lending survey also showed further pressure from tighter lending standards and weak borrowing demand. EURUSD slid back lower to the 1.06 handle from highs of 1.0694.
While the Eurozone growth outlook continues to deteriorate, a lot of the bad news is priced in the EUR. China stimulus plans also will likely be modestly supportive for EUR, but a significant dovish surprise from the ECB this week could threaten channel support at 1.0570. Reversal above 0.236 resistance at 1.0643 may be needed to bring uptrend in focus.
Market Takeaway: Macro backdrop remains downbeat but positioning has been turning long. All eyes on ECB where a dovish surprise can bring EURUSD lower to 1.0550 levels, but spikes to 1.0650 area remain likely as USD loses traction.