US inflation numbers to set the tone for USD into year end

Good morning

It was a fairly quiet day in the currency markets yesterday as we’d anticipated. GBPUSD was stuck around the 1.2550 area, very much the same as yesterday morning, EURUSD was a few points lower around 1.0745 which meant GBPEUR ticked a smidge higher to hit almost 1.1700 through the afternoon but this morning we see EURUSD at 1.0775 while GBPUSD is around 1.2560, bringing GBPEUR is back to 1.1655.

The slightly lower GBP came after UK employment numbers were released earlier this morning, they were broadly in line with expectations, if anything they looked very slightly better to me, particularly given a positive revision to last months release, although this was offset by a slightly lower than expected average earnings number. It is the latter that will likely please BoE most of all, high wage growth has helped drive inflation and any decline is helpful although at these elevated levels it is likely still too high if we are hoping to see inflation move back towards target. UK GDP tomorrow morning is important but likely to be overshadowed by other economic events.

The US dollar is off its recent highs ahead of today’s key inflation release. We’d have to see something seriously away from expectations for the market to adjust its ‘no change’ thinking for the Fed announcement this week but nevertheless todays report does have the potential to push the dollar around. For the record, markets are looking for a headline of 3.1%, down from 3.2% last month, with a core reading unchanged at 4%. A higher number must surely be USD positive.

USDJPY is lower in line with the general USD weakness. Having hit a high yesterday around 146.60, it currently trades at 145.45. We have seen a decent amount of volatility in Yen over the past few days and swings of 100 pips are becoming the norm. USDJPY is certainly nervous and the CPI and/or Fed announcement could push USDJPY around more than others. Vols are high as a result which makes options expensive, too expensive really unless you get really lucky.

A good example of this is the cost of the overnight at the money straddle which is priced over 120 yen pips. I’ll give more detail about what that means another day, but as a very rough guide it can suggest the markets are looking at a move somewhere in that magnitude.

We’ve seen a bit of downside interest in EURJPY, UBS techs in particular has suggested going short around 157.50 with a target of 152.20. Meanwhile UBS research think that US could cut rates to 2.75% next year, taking USDJPY to the 130.00 area.

We will hear from Feds Powell at tomorrows FOMC rate announcement and how he responds to the inflation number will likely set the tone for USD into year end. We’d expect him to continue with the ‘higher for longer’ narrative despite some market thinking that Fed could reduce rates at a faster pace next year, although there is potential for Powell to suggest US rate may have peaked.

I mentioned yesterday how I’d like to see stricter rules on footballers surrounding referees. We know referees don’t always do a good job but they are faced with huge amounts of pressure and hatred. None more so than in Turkey, where it has been reported that a referee in the highest level of Turkish football was attacked on the pitch and hospitalised by the President of one of the teams. The Turkish FA has suspended all leagues for the time being following the attack.

For those down on the Isle of Wight, you’re advised to stay away from Ventnor after a landslide on Sunday saw some residents having to leave their houses. Drone images show a huge section of cliff having fallen away.

Other than the US data, the other event of interest today will be the MPs vote on the governments Rwanda bill. Sunak is wooing Tory MPs this morning to encourage them to back the bill. The scheme has met with huge criticism to date and a defeat for Sunak would be another sign that his leadership could be drawing to an end. I may be in a minority here but I think the plan has merit.

A controversial view I know, and one that opens me up to being accused of many unsavoury things, but those people coming to the UK in small boats looking for safety have surely already found safety in France. If they ventured from the safety of France to find safety in the UK, who should we not then lead them to safety, albeit in another country? Ultimately I believe the system is more to act as a deterrent to those thinking of making the dangerous journey in small boats.

I feel so deeply for those people who have been ousted from their homelands, losing everything they own and forced to find refuge overseas. Mind you I was reading the other day about a family who escaped Somalia seeking refuge in the UK, we’ve helped them out with housing and benefits, but they still travel back to Somalia for their holidays. Something isn’t quite right there. Anyway, we’ll see whether Sunak can convince his own MPs to follow the party line.

- 10.00 German ZEW

- 13.30 US CPI

- 19.00 US monthly budget statement

- 23.50 Japan Tankan survey

- 07.00 UK GDP, industrial production

Stronger US employment numbers push USD higher, busy economic calendar this week

Good morning

A stronger nonfarm payroll number Friday sent the USD higher. The headline of +199k was good but the greater surprise came from the lower unemployment rate of 3.7% compared with an expectation of no change from the 3.9% last month. GBPUSD traded down to 1.2500, EURUSD to 1.0725 in a knee-jerk move but by the London close both had regained at least part of those losses, trading around 1.2545 and 1.0765 respectively and as I type this morning we are still pretty much at those levels.

Yen has given up last weeks gains with USDJPY now back up to 146.35, indeed we say USDJPY jump from 145.50 to current levels after the London open this morning, yet another move that remains so far unexplained other than unwinding of short term speculative downside USDJPY trades. If I was due to look for downside trades last week, surely I should be doing so now!

Don’t be fooled by the very limited economic calendar today. There is certainly nothing of interest today but the rest of the week is pretty packed including UK unemployment and US CPI tomorrow, FOMC rate announcement Wednesday, BoE and ECB rate announcements Thursday, together with US retail sales, while Friday brings a host of UK, EU and US PMIs. We’ll also get NZ GDP and Aussie employment Wednesday night/Thursday morning. Something for everyone there.

US CPI aside, the rate announcements are likely to be key, not so much the rate decision itself for they are all widely expected to be unchanged. However the accompanying statements will be important, I’d expect all of them to continue to push back against the talk of rate cuts into next year. The Fed ‘dot-plot’ will show latest Fed thinking which is likely to still be behind the market expectations.

Meanwhile Goldman Sachs have said they see BoE cutting rates in August 2024 and continue to do so until mid-2025, targeting a rate of 3%. Just in time for the general election perhaps? Goldmans also bring forward their forecast for the first US rate cut from Q4 2024 to Q3 2024.

In sport over the weekend, Spurs managed their first win since 27th October with a decisive victory over Newcastle. We’re in for a fantastic second half of the season in the Premier League, with arguably eight teams at least fighting for the top four places. Aston Villa are the current heroes, up to third place after beating Arsenal at the weekend, whether they can continue their run of form remains to be seen. Still arguments over VAR continue after more uncertain refereeing decisions.

Obviously our ability to slow things down and analyse them second by second does change our perspective on a lot of decisions and as I have said before, I have sat watching matches with my family and we sometimes have a difference of opinion on a challenge or hand ball despite having seen it slowed down in minute detail, so I do understand how ‘experts’ can get it wrong from time to time, but there are still too many poor rulings for my liking.

Still, i would love to see players booked for surrounding referees, and even sent-off if they do not learn their lesson. Its about the easiest improvement we could make to football, and would set a better example to kids who play the game and grow up believing it is OK to confront the referees.

Hope you had a good weekend, sit back and enjoy perhaps a quiet day ahead of a busy week ahead. We had some pretty lousy weather over the weekend but after today the forecasts suggest it’ll be a bit drier, if not warmer. Oh, and just two weeks to go until Christmas. Which is really one weekend, because no one will want to be shopping on Xmas eve. You have been warned….

- 22.20 RBAs Bullock speaks

- 22.30 AUS Westpac consumer confidence

- 07.00 UK unemployment

USDJPY collapse spooks the markets ahead of US nonfarms

Good morning

A quick glance at the currency levels today and you’d think not a lot has changed, USD a touch stronger against GBP and EUR, Yen a little stronger. But that doesn’t tell the full story. USDJPY, which as we know had pushed lower from 147.35 to 145.15 after some hawkish rate talk from BoJs Ueda, continued to trade lower through the afternoon before collapsing to 141.70 in pretty much the blink of an eye. It shifted higher again soon after, and has worked its way back up to 144.15 as I type.

An interesting move for sure, I’ve not yet seen a satisfactory reason behind it although I would not be at all surprised if it was stopping out a large long USDJPY position. This talk of a possible move away from negative rates by Japan is gaining traction, market seems to be pricing in an April move. Japanese equities don’t like it, the Nikkei closed down 1.7% overnight. There will be more volatility to come for Yen that’s for sure ahead of the next BoJ meeting on 18th Dec. It has already moved from 151.90 or so in mid-Nov to that 141.70 low, I’ll be looking to see if I can find a relatively cheap downside option play targeting a move below 140.00 just in case.

I’d mentioned interest in upside AUDUSD earlier in the week, for a while it looked like a wrong call but it held in the low-0.65s and has now broken back above 0.6600. Not a major move but do bear in mind this is against a stronger USD, while other majors have lost ground. To emphasise the point, GBPAUD is now just a touch above 1.9000, some 250 points off yesterdays levels, and AUDNZD is also higher at 1.0745, from the mid-1.06s.

GBPUSD is currently 1.2565, just 20 pips or so off yesterdays lows. A KPMG report on UK employment painted quite a dismal picture overnight, showing companies are limiting the hiring of permanent staff, which highlights problems in the UK economy. Our political situation remains laughable which, while not at Truss/Kwarteng levels, hardly adds any confidence, with talks of growing unhappiness amid Tory party members. Sunak is likely to face some sort of rebellion in the coming weeks.

GBP lost a little of its ercent gains against EUR, GBPEUR now 1.1650 having been almost 1.1700 a day or two ago. Not a dramatic move but this 1.1650 area has supported for a week or so, a break lower could open up a move back into the 1.15’s.

US nonfarm payrolls will be the main event today. A headline around +200k is expected, with the unemployment rate holding at 3.9% after a surprise tick higher last month. A stronger headline and a move lower in the unemployment rate could give USD a bit of a push into the end of the week, although this could be tempered by a possible reduction in the average hourly earnings to 4%.

That’s all from me this week, as you know next week brings rate announcements from Fed, ECB and BoE but for now it is BoJ who are providing most of the volatility. The weather over the weekend looks like it’ll just be heavy rain so I’m not planning on doing too much outside. The next couple of weeks look colder and drier, I’ll take that over heavy rain for sure.

Have a great weekend when it comes….

- 09.30 UK consumer inflation expectations

- 13.30 US nonfarm payrolls

- 15.00 US Michigan sentiment survey