FX Daily: Markets correcting, no trend reversals yet

EUR and GBP capped at 1.16 and 1.36 respectively
Philip Wee09 Nov 2021
    Photo credit: Unsplash Photo

    DXY index is lower on improved risk appetite but support remains strong at 94. Major US stock indices achieved record highs again on US President Joe Biden’s USD1.2tn infrastructure bill approved over the weekend. However, gains in the Dow, S&P 500 and Nasdaq Composite were modest at 0.29%, 0.09% and 0.07% respectively from Fed hike expectations lifting the 2-year US treasury yield to 0.44% from last Friday’s low of 0.40%. Fed Vice Chairman Richard Clarida reckoned that the Fed’s three conditions – inflation, unemployment rate and GDP growth – for lifting rates would be met by end-2022. St Louis Fed President James Bullard affirmed his view for two hikes next year. The market brushed aside the Fed’s comments on transitory inflation. Tomorrow, consensus expects CPI inflation to rise to 5.9% YoY in October from 5.4% a month earlier and core CPI to 4.3% from 4.0%. 

    EUR recovered a second session but did not close above 1.16. The improvement in the Sentix Investor Confidence index from 16.9 in October to 18.3 in November was not enough to allay slowdown worries in the Eurozone. Although this was the first improvement since July, the average 17.6 reading in the first two months of 4Q was below the average 23.9 in 3Q. More importantly, current situation index weakened to 23.5 from 26.3 and averaged 24.9 in October-November, less than the 30.5 average in 2Q. ECB President Christine Lagarde and Chief Economist Philip Lane pushed back against expectations for rate hikes next year and insisted that higher inflation was transitory and not chronic. 

    Similarly, GBP’s recovery appears capped at 1.36. Bank of England Governor Andrew Bailey warned of rate hikes if inflation expectations pressured wages higher in the UK. Having been caught wrong-footed last Thursday, when the BOE did not deliver the rate hike Bailey flagged on 17 October, it was understandable why the 2-year gilt yield rose less than its US counterpart to 0.417% from 0.408%. At best, the BOE bank rate is only expected to increase to 0.25% from 0.10% at its meeting in mid-December. Monday was also the first day since 8 September that the 2-year gilt yield closed below its US counterpart.

    UK’s relatively weaker growth outlook was also reflected by its flatter yield curve; the 10Y vs 2Y spread was 44 bps in the UK vs 105 bps in the US. On 11 November, the Office for National Statistics is scheduled to report a deceleration in GDP growth to 1.5% QoQ sa (consensus) in 3Q from 5.5% in 2Q. Apart from monitoring the impact of the furlough scheme that ended on 30 September, the BOE is likely to be paying attention to downside risks from Brexit. According to the Financial Times, Ireland warned that the EU could abandon the whole Brexit agreement if the UK triggered Article 16 to suspend parts of the withdrawal agreement to pressure Brussels to rewrite the Northern Ireland protocol.

    Philip Wee

    Senior FX Strategist - G3 & Asia
    [email protected]

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