FX Trading focus: BoE trips up market, High bar for US jobs report? CZK carry trade?
Bank of England trips up market with no hike and forward guidance. A majority were looking for a 15-basis point hike at yesterday’s Bank of England meeting and fairly strong guidance from the bank on its intent to hike rates further at coming meetings. Instead, it got no hike and a Governor Bailey reluctant to commit to much in the way of forward guidance. The Governor had the gumption to say it was not the Bank’s job to guide the market “day by day and week by week” on interest rate hikes. He also waxed cautious on how the jobs market would behave in the wake of the recent end to the furlough scheme. The market was rather traumatized by this terrible communication breakdown after often urgent, if also confusing, rhetoric from Governor Bailey himself on the need to get started on hiking rates. Expectations for the policy rate by the end of next year dropped more than a full 25 basis points in the wake of this debacle as the market resets its expectations. UK jobs and earnings data will carry added weight from here relative to headline inflation.
There is a high bar for the US jobs report to jolt Fed rate hike expectations back higher, which is not to say that this and future reports don’t eventually clear that bar. Fed Chair Powell has set up a tense period for how to treat incoming data as he still believes that inflation will fall back even if “baseline expectation is supply bottle necks and shortages will persist well into next year and elevated inflation as well.” This suggests that almost any level of inflation in the coming handful or more of months won’t jolt Fed guidance without other incoming data clearly pointing to a rapidly tightening job market and even a budding wage-price spiral. Earnings could seize increasing attentionin particular, as huge payrolls growth numbers are unlikely to be sustained in a US labor market that is supply constrained by millions of early retirements during the pandemic, ongoing virus concerns keeping some parents in part-time roles, and vaccine mandates sidelining others. Today’s October Average Hourly Earnings rise is expected at +0.4% MoM and +4.9% YoY. The October nonfarm payrolls change is expected at +450k after the low +194k print for September. If the data is fairly in-line, not much may change at the short end of the US yield curve, but very interesting to see what happens at the longer end of the yield curve on any data surprise. Would hot data unmoor the longer end on the assumption the Fed is getting to reckless here?
Chart: EURUSD vs. 2-year EU-US yield spread
There is no iron law that says a currency pair has to track the developments in relative yields, but it is often an important driver, and the last year or so of market auction has shown a strong directional correlation. Will today’s US jobs report release keep US short yields relatively elevated after the ECB has pushed back against market pricing of rate hikes next year and send the EURUSD plunging through 1.1500, toward the ultimate trend test into the 1.1300 area (the 61.8% retracement of the rally from the 2020 lows to 2021 highs comes in at 1.1290.