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Strong US GDP fails and rising Middle East tensions fail to push USD higher

Good morning


For once the US dollar was unable to benefit from strong numbers. US GDP came out at 4.9%, better than consensus although not quite as strong as some of the more hawkish forecasts I mentioned yesterday. There was an initial push up for USD but it didn’t last long. Even concerns over escalation of tensions in the Middle East, with US confirming it has struck targets in Syria used by Iranian backed forces, hasn’t given USD any further boost.


ECB did leave rates unchanged yesterday as expected, the first time they have not raised rates since June 2022. Lagarde was pretty downbeat, she mentioned that the economic activity in the eurozone is still weak and the situation in the Middle East makes risks less predictable. She didn’t fully discount the idea that rates may need to rise again at some point but the impact of previous rate rises is still feeding in, suggesting they are not in a rush to raise rates at all. There was no mention of any reduction in asset purchases under the PEPP scheme, it is thought we could see something on this at the December meeting, when the ECB forecasts are updated. Lagarde did make clear that rate cuts were not on the agenda, the market is eyeing late summer 2024 but there is a lot that can happen between then and now.


EURUSD weakened on the headline, reaching 1.0525, before pushing up to 1.0560 as Lagarde was speaking and despite a couple more attempts to go lower, we are actually back around that 1.0560 area as I type. EUR also weakened against GBP, taking GBPEUR back above 1.1500, but failed to break Tuesdays high of 1.1520 and has since slipped back to 1.1480. GBPUSD meanwhile made a decent attempt to push higher but so far has been unable to break the 1.2140 area which has capped the upside a few times.


Japan CPI was higher than expected overnight, USDJPY dipped a few points but nothing dramatic. The pair has since traded lower but remains above 150.00 for the time being. The more price action I see, the more I think Japan are selling sharp rallies to prevent a dramatic weakening but are choosing to not fight the market and letting yen depreciate slowly. Otherwise they are still relying on verbal intervention which seems to be falling on deaf ears. If you do think we could see more yen weakness, buying a 3 month (26 Jan) 154 USDJPY call costs 85 yen pips. Cheapen that up by adding in a 160 knock out and the price becomes 20 yen pips. A lot of focus now on BoJ meeting next week where we may also learn whether BoJ have been intervening in the currency markets, as we suspect.


In sport, England suffered another humiliating defeat in the cricket world cup, this time it was Sri Lanka who made light work of beating a very sorry England performance. A shocking tournament for the current holders. We hope for better things from England’s rugby team when they take on Argentina for third place of the world cup this evening, England are favourites although something tells me Argentina will be more up for it than England. This leaves us just with what could be a stunning final on Saturday between New Zealand and South Africa. Clashing with the England rugby this evening is Spurs v Crystal Palace, a win would put Spurs further clear at the top of the table. At some point Spurs will come unstuck but let’s hope it won’t be today.


With Tyson Fury boxing and the Mexican F1 to also fill up the weekend (probably best to ignore England v india in the cricket), it doesn’t matter so much if the weather remains miserable, just as well really given the forecast looks wet and that carries through about the same for the next couple of weeks unfortunately. The hole in my roof is a larger job than I’d hoped to repair and may not be done until the spring, which means I’ve got a winter to put up with a leaky ceiling. I’m hoping they do a temporary patch up job before then.


So what with the current global news and the weather its all pretty miserable. On a happier note, I’ve been reading about a town council which bought an old bust many years ago for £5, which had then been used to hold a shed door open. It turns out to be a bust from 1728 of Scottish landowner Sir John Gordon, worth nearly £3 million. The council are looking at possibly selling it but the locals are rightly unhappy, particularly as the buyer is outside Scotland. There must surely be a place in a museum for it. And anyway I wouldn’t trust many councils with a £3m windfall.


Have a splendid weekend, I hope you get dry spells amid the showers.


- 13.30 US Core PCE, personal income, spending

- 15.00 US Michigan sentiment survey


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