Head of FX Strategy
Summary: Tomorrow’s CPI number is the most significant US data release this week. A survey of the last four US CPI releases shows that there have been very few surprises of note in the data series, with last month’s March CPI report surprising slightly to the downside at the headline. With the market searching for catalysts here, any data surprise could trigger significant intraday volatility, and today’s article looks at the scale of market volatility to the last four releases across asset classes.
Today's Saxo Market Call podcast
Today's Global Market Quick Take: Europe from the Saxo Strategy Team
FX Trading focus: Mean reversion the name of the game recently – sterling set to join in?
Bias notes today:
Yesterday once again demonstrated a market that doesn’t want to sustain directional moves for long after the US CPI triggered a slide in US treasury yields and the US dollar. While yields stay lower, the greenback entirely failed to hold and has even reversed quite aggressively higher into the early European trading today. The euro continues its weakness, while the JPY rally attempt yesterday on the dip in yields has also failed to sustain as the wily USDJPY has bobbed back above 134.75 after testing below 134.00 overnight. AUDUSD ran lower on weak China CPI data and especially as copper tests below its 200-day moving average this morning – a critical coincident indicator for the Aussies, and likely the reason that AUDNZD is testing the last shreds of support.
Bank of England: another mean reversion setup? Given nearly every direction move of late has failed to find fuel as this market scratches around for a narrative, one wonders whether the last couple of weeks of extensive sterling strength will also mean revert/consolidate on the Bank of England event risk today. (The struggle to get momentum going almost anywhere is reflected in the two months of bottled up range trading in US treasury yields – arguably we should all wait for a break of the 2-year or 10-year yields out of the range as the next big macro signal). The BoE is expected to hike the policy rate 25 basis points, and the forward curve looks a bit aggressive at over 40 additional basis points of tightening through the November meeting, by which time the Fed will supposedly be cutting for the second time by 25 basis points. One half of that scenario feels unlikely, unless the US is making an own goal by taking the debt ceiling issue beyond the brink (some sort of spending limitations seem more likely to me than any technical defaults on treasuries, in my view.) Will the BoE be willing to signal as much further tightening here as the market has priced? The bar feels higher for a hawkish than dovish surprise today, especially as BoE Governor Bailey seems ever reluctant to favour a clear hawkish message. Any suggestion that the BoE is revisiting its aggressive disinflation forecasts could help justify market expectations.
Chart: GBPUSD
GBPUSD closed almost unchanged for three consecutive days after getting capped yesterday on the failure of the greenback to stay lower in the wake of the CPI release. If the BoE surprises dovish, the first focus will be the psychological 1.2500 rea, but the 1.2450-00 area looks far more important here for whether cable will remain in this uptrend. To the upside, the next focus is the 61.8% retracement of the entire sell-off from the 2021 highs of 1.4248 (can you believe it) to the panic lows of Truss-Kwarteng near 1.0350 (can you believe it).
Table: FX Board of G10 and CNH trend evolution and strength.
The Euro weakness is only exceeded by CNH weakness, but note the huge momentum shift lower after its former strength. Elsewhere, JPY has a long way to go to prove itself – needing a more significant yield melt-down to confirm the recent reversal in some JPY crosses. The NZD outperformance is looking stretched – NZ inflation expectations up tonight possibly key there.
Table: FX Board Trend Scoreboard for individual pairs.
The EURNOK uptrend looks set to end unless we see a huge rally into the close today (after over 110 days in positive) Note that USDJPY is close to a downtrend, but needs another solid sell-off bar to confirm that it is developing momentum. It looks about the same for EURJPY.
Upcoming Economic Calendar Highlights
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
