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USD holds recent gains, EUR softer on rate cut thinking

Good morning


US Dollar had a bit of a push higher yesterday afternoon, helped by a better than expected ISM headline. GBPUSD broke through the 1.2600 area that had held for a week or so, trading down to 1.2580. It regained 1.2600 overnight but as I type we are testing below that level once again. Similarly EURUSD traded lower, it had been around 1.0830 yesterday afternoon but pushed quickly below 1.0800 and this morning we have seen further EUR selling which has taken the pair to 1.0775.


This morning’s move comes after some disappointing German factory orders numbers, which in turn follows dovish comments from ECB officials. GBP continue to make gains against the single currency, GBPEUR hitting 1.1690, almost 300 pips higher than the late-Nov lows around 1.1410. Current thinking seems to be that of Fed, BoE and ECB, it is the latter who is most likely to cut rates first.


Aussie GDP came out weaker than expected overnight but AUD has failed to react, AUSUSD up from yesterday’s lows of around 0.6550 to 0.6590, GBPAUD had traded up to 1.9260 yesterday but is back down now to the 1.9130 area. AUDNZD is down at 1.0680, lowest levels since mid-October and well off the 1.0940 highs we saw in November.


Moodys have upset China by downgrading their sovereign bonds to negative, citing concerns about their level of debt. China have said Fitch is using out of date property market data and fail to consider recent growth plans. Both S&P and Fitch have kept their ratings unchanged. There have been some reports of China banks selling USDCNY to prevent Yuan depreciation although at around 7.15 we are still well below levels seen through mid-August to mid-November. China still continue to fix USDCNY lower than market levels, it was set at 7.1140 this morning.


We expect BoC to keep rates unchanged at 5% at today’s rate meeting following some slight softening in economic data. Markets are looking for a rate cut from BoC sometime around the April 2024 meeting which will come around quickly enough, for now USDCAD is 1.3560, off the early Dec lows of 1.3480 which also marked the lowest levels since September.


Boris Johnson appears before the Covid inquiry later today. I cannot say the government did everything right during Covid but overall I’m never going to argue against their response and actions through the pandemic, other than as readers back then will know, I thought the lockdown should have come sooner and incoming flights should have been stopped, particularly those from China. All very easy to criticise in hindsight, particularly if you trawl through the wording of every text message and email. Some difficult decisions were made and it really was a no-win situation.


My only suggestion that I still think would have helped would have been to have a strict lockdown of two weeks each three months or so. Given the incubation of the virus was around ten days, this would have stopped much of the spread of the virus without having to have extended lockdowns. Anyway, no doubt Johnson will get a good going over today.


Arsenal extended their lead at the top of the Premier league with a late winner from Declan Rice over Luton, the match finished 4-3 to Arsenal, Luton will be kicking themselves for conceding a late goal. Several matches this evening and Spurs will be hoping to get back to winning ways when they take on West Ham tomorrow evening.


In the meantime we’ll be watching the BoE financial report this morning and then the US ADP employment numbers this afternoon. As you know, this is an unreliable indicator for US nonfarms but is closely watched nevertheless and does have the ability to move the currency markets.


- 10.00 EU retail sales

- 10.30 BoE financial stability report

- 11.00 BoE press conference

- 13.15 US ADP employment

- 13.30 US unit labour costs

- 15.00 BoC rate announcement

- 15.00 CAD Ivey PMI

- 00.30 AUS trade balance

- 03.00 China trade balance

- 07.00 German industrial production


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