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We saw a subdued and negative start to the week for markets in Europe yesterday, following on from a weak Asia session, with some mild profit taking after the exuberance of the last couple of weeks.

US markets also saw a similarly modest subdued start to the week, with most of the day’s excitement taking place in the bond market, after a strong 5-year bond auction prompted a sharp fall in US 10-year yields towards last week’s lows below 4.4%.

When combined with a weak October new home sales report, as well as a weak Dallas Fed manufacturing survey, it is becoming increasingly apparent that markets believe that we will start to see rate cuts by the middle of next year, despite the attempts of various Fed officials to push back on this idea.

Today it will be the turn of Fed governors Christopher Waller and Michelle Bowman, along with the Chicago Fed President Austan Goolsbee who will be tasked with pushing the “higher for longer” narrative that the central bank will want to maintain.

The US dollar had a broadly negative day, helped in some part by the extension of the ceasefire in Gaza, which in turn also served to weigh further on the oil price ahead of Thursday’s OPEC+ meeting.

The unwinding of the US dollar trade appears to be being driven by two factors, firstly the idea that the Fed is done on the hiking front, hence the recent slide in yields, and secondly the reduced risk premium that we’ve seen over the past 2-weeks as markets become comfortable with the idea that the conflict in Gaza can be contained.

Whether that weakness is maintained will probably depend on how markets perceive this week’s core PCE inflation numbers for October, however given the losses seen so far this month, the reaction may well be limited by month end positioning.

Today’s US consumer confidence numbers for November could also be instructive given the strength of the consumer spending numbers we’ve seen over the Thanksgiving weekend.

Expectations are for a modest decline to 101 from 102.6, however these numbers can be highly volatile so there is the prospect of an upside surprise, given the decline in gasoline prices seen over the past few weeks.

It’s also worth keeping an eye on the pound given the sharp slowdown we saw in inflation in the recent October numbers. This morning’s British Retail Consortium shop price index numbers for November saw headline inflation slow from 5.2% in October to 4.3%, the lowest level since June 2022, with food prices lagging behind at 7.8%. 

Recent UK economic data has proved to be slightly more resilient than expected which in turn has helped lift the pound on the basis that it will mean the Bank of England will have to defer cutting rates until later in 2024, despite saying the growth outlook for the UK was the worst he’s ever seen in his lifetime. Hyperbole aside this is also the same Bank of England who a year ago were predicting a two-year recession.

Yesterday Bank of England governor Andrew Bailey went to great lengths to reinforce that idea, while later today we will get to hear from Deputy Governor Dave Ramsden as well as external member Jonathan Haskel. At the November meeting Haskel was one of 3 MPC members who voted for a 25bps rate hike so his comments will be especially instructive.

EUR/USD – continues to be capped at the 1.0960 area, with the August peaks at 1.1060/70 the next resistance. We need to hold above the 1.0840 area to signal the prospect of further gains. We also have support at the 200-day SMA at 1.0810.

GBP/USD – having broken above the 1.2450 area and 200-day SMA, as well as breaking above 1.2590, 50% retracement, we could well see a further extension towards the 1.2720 area, which is 61.8% retracement of the 1.3140/1.2035 down move. Upside momentum remains intact while above 1.2450.

EUR/GBP – another lower low yesterday at 0.8657 as we look for a move towards the 0.8620 area. Resistance currently back at the 0.8720 area.

USD/JPY – the last 4 days has seen the US dollar hold below the 50-day SMA at 149.70/80. While this level caps the risk is for a move back to the lows last week at 147.15. A break of 150.20 potentially retargets the main resistance at the 151.95 area.


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