Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Head of FX Strategy
Summary: US October PCE data had dovish hints, but market did not extend the dovish momentum on the release suggesting signs of a fatigue. Any hawkish hints in Powell’s speech today could mean further USD gains even as a broad bearish picture remains intact. EURUSD however reversed from 1.10 on softer Eurozone CPI and downside pressures could escalate as ECB dovish repricing takes hold. Key EUR crosses to consider could be EURGBP, EURSEK or EURNZD.
The US dollar has been on a roller-coaster this week. DXY index extended its decline of the last two weeks to break below the 103 handle earlier in the week on the back of dovish Waller and a technical break lower in 10-year Treasury yields, but recovered into the end of the week as month-end flows and relatively less hawkish Fed speakers took centre stage.
October PCE data released yesterday was full of dovish tilts. Personal income and spending slowed sharply to 0.2% MoM each, from 0.4% and 0.7% respectively in September. PCE deflator came in below expectations on the headline and matched expectations on the core, with core PCE now at 3.5%, below the projection of 3.7% in Fed’s September SEP. This showed the inflation is coming down faster than Fed thought it could, at least on a cyclical basis.
However, the market seems to have fatigued on the dovish tilt, and Treasury yields and dollar rose in the session.
Focus now shifts to Chair Powell, who speaks at a fireside chat today. After a steep dovish turn from Fed Governor Waller in the week and tempering hawkish bents by other Fed members, it may be difficult for Chair Powell to come in extremely hawkish. However, with dovish fatigue, marginal hawkishness could also be relevant, especially given that markets are already pricing in more than 50% odds of a rate cut in Q1. Saxo’s momentum tracker, as shown in the chart below, shows USD momentum turning positive in the last two days.
Eurozone November CPI cooled more than expected, with the headline coming in at 2.4% YoY, significantly below last month’s 2.9% and getting in close sight of the ECB’s 2% target. Core also cooled from 4.2% YoY in September to 3.6% in October, coming in below 3.9% expected. Market pricing for the ECB also shifted dovish, with the first full rate cut now priced for April compared to June at the start of the week before the regional inflation prints were reported. For comparison, the first full rate cut for Fed is priced in for May as of today.
EURUSD came back to test the 1.09 handle from highs of 1.1017 earlier in the week. Support at 1.0865 held up for now. However, with inflation cooling and PMIs indicating a contraction, it will remain hard to justify further EUR strength.