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  • richard evans

Will Powell be as dovish as the market hopes?

Good morning

Well the long-awaited US inflation number turned out to be something of a non-event yesterday, possibly because it came out exactly in line with expectations at 3.1% (core 4%). We did get a little bit of USD movement, GBPUSD traded from 1.2580 up to 1.2615, back down to 1.2520, before settling at 1.2555 which is just a handful of pips away from the rate when I was writing this report yesterday morning.

Similarly, EURUSD had a quick spike higher to 1.0825 followed by a drop to 1.0770, before settling at 1.0780. A better than expected German and EU ZEW economic sentiment number yesterday morning had given EUR a bit of a push over GBP, indeed GBPEUR traded as low as 1.1620 through the afternoon, before regaining the 1.1650 area.

This morning’s UK GDP and industrial production numbers were both disappointing, coming in lower than expected, GDP at -0.3% (exp -0.1%) and industrial production -0.8%. As you’d expect GBP was hit, GBPUSD traded back down to the 1.2520 area and GBPEUR slipped to within a few points of 1.1600. As I type we are currently 10 pips or so off those lows. A fairly gloomy set of numbers.

In other UK news, Sunak lives to fight another day as the government’s Rwanda bill passed its first vote in the Commons. The majority was 44, some Tory MP’s abstained in defiance of party orders. This is the first of many votes so we are some way off. Its only a small win for Sunak. A real problem is that after many years in power, the government seems so disjointed.

Sunaks power is often undermined, most recently the Scottish leader Humza Yousaf was berated by David Cameron for meeting Turkey’s Erdogan at the COP28 summit without any member of the Foreign Office being present, a huge breach of protocol. He should probably resign for such a breach. When Pritti Patel met Israel’s Netanyahu with no UK officials present she was forced to resign. Something tells me Yousaf won’t face the same pressue.

New Zealand have passed a law to allow RBNZ to focus solely on inflation when setting policy, rather than also taking employment into account. Overall this is a hawkish move, allowing RBNZ to raise rates to control inflation without having to consider other economic aspects. This kicks off in February, although the reality is that short term policy decisions won’t be affected. NZD did try to push higher but the excitement didn’t last long and it actually trades a bit lower now. GDP numbers due out tonight are not expected to offer any great support.

Argentina has devalued its own currency over 50% to 800 to US$1.00. USDARS had previously been artificially held around 350, although I recall trading USDARS back in the early 2000’s when it was around 4.00. That’s a horrific move, eclipsing the depreciation of TRY many times over. Argentina’s new government is trying to fix their horrendous economic problem by slashing public spending. A weaker currency won’t help their battle with inflation which is currently running at around 140% but incoming President Milei says only a sharp shock would enable Argentina to recover. With US$44bn owed by Argentina to IMF, it is difficult to see a way out without some sort of debt write-down.

Oil prices have fallen to lowest levels since June, with WTI at around $68.00 and Brent around $72.50. We are close to support levels that have held several times through 2023, the same levels pretty much capped the upside in 2019. Beyond these lows we go back to December 2021 for lower levels. I’m certain we’ll see that reflected in fuel prices at the pumps!

In other news, two votes have taken place with are likely to have little lasting impact. The first is from COP28 who pledge to move away from fossil fuels for the first time, the second is the UN vote demanding an immediate ceasefire in Gaza. Both votes made with the best of intentions, both very difficult to actually follow through with. In the latter, it is clear Israel are losing support for their action against Hamas but their resolve to eliminate Hamas remains just as strong.

So, FOMC rate announcement this evening where rates are expected to remain unchanged. Powells statement will be key as the market looks for some reassurance that rates may have peaked. I’m not sure Powell will say that, in fact he may still leave the door open for rate rises just in case they are required. However the latest US inflation number will help Fed to some extent although the market still looks for more rate cuts in 2024 than Fed seem to be pricing in. The new ‘dot-plot’ will give a decent insight into current Fed thinking.

Fed are in a difficult position here. If Powell doesn’t talk of a peak in rates and rate cuts through 2024, Fed can be accused of being too far behind the curve. If Powell were to talk of rate cuts through 2024, the market will no doubt price further rate cuts over and above Powell. The market thinks the Fed and Powell will be dovish, I have a sneaky feeling Powell will be less dovish than the market is looking for.

- 10.00 EU industrial production

- 13.30 US PPI

- 19.00 FOMC rate announcement

- 19.30 FOMC press conference

- 21.45 NZ GDP

- 00.00 AUS consumer inflation expectations

- 00.30 AUS unemployment

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