Sovereign International Daily Market Report
Mixed Powell remarks leads to volatile trading environment
Highlights:
A relatively contrasting set of communications from Federal Reserve chair Jerome Powell triggered some volatile moves in currencies and the fixed income market on Thursday afternoon.
Speaking in New York, Powell delivered a handful of dovish remarks, though the dollar snapped back after he noted that US policy wasn't all that tight. EUR/USD put in a solid performance yesterday, advancing back up for the first time in a week. Wednesday’s Euro Area inflation data came in as expected, and had little impact on the currency. Comments from ECB member Visco were, however, somewhat more hawkish than much of the rhetoric out of the Governing Council, as he warned over the second-round effects on inflation. In the UK, the mildly stronger-than-expected inflation data from earlier in the week has not really provided much support for GBP, which remains among the worst performing G10 currencies in the past month. This morning’s UK retail sales data is likely to be closely watched by market participants.
FOMC chair talks up new risks, but hints at more hikes
Powell’s highly anticipated speech on Thursday didn’t disappoint. In his remarks, he continued to say that further US rate hikes were possible, in light of above-trend growth and its impact on inflation. He did, however, note that there was evidence of a cooling in the US labour market, with some indicators approaching levels witnessed before the pandemic. The Israel-Palestine conflict was also cited as a fresh geopolitical risk that had created an uncertainty to the outlook, though it's not quite clear what impact the war will have on the economy. Interestingly, Powell also echoed rhetoric from fellow FOMC members, saying that higher Treasury yields acted to tighten financial conditions, implying that this could less the need for additional Fed hikes.
His comments were not all dovish, however, as he also said that evidence suggested policy was ‘not too tight’. This was enough to trigger a reversal in the dollar’s course and, by the time his interview was done, both the greenback and US yields were trading higher.
Israel-Hamas conflict keeps safe-haven currencies well bid
Away from central bank decision making, clearly the main news story globally at the moment remains the ongoing conflict in the Middle East. Tensions are sky-high following the deadly blast at a hospital in Gaza city earlier in the week, and the continued air strikes from Israel. As we’ve mentioned since the first attack by Hamas less than two weeks ago, the fallout in financial markets from the war has so far been rather contained, perhaps surprisingly so. Safe-haven assets have performed well as one would expect, in FX that includes the dollar and Swiss franc, though we have not seen sizable panic moves thus far.
We see the biggest risk to markets as a blow up in oil prices, should neighbouring oil producing countries, notably Saudi Arabia and Iran, become involved in the fighting. Brent crude oil futures have risen by around 8% since the Hamas attack on 6th October, which has provided a bit of support for commodity-dependent currencies such as the Colombian peso, the Canadian dollar and the Norwegian krone. This is, however, still a relatively contained move all things considered, and there remains plenty of room for additional upside in oil prices should we see an escalation in fighting. Not only would this be bullish for commodity currencies, but it could also elicit a hawkish response from central banks globally, should policymakers see higher oil prices as a risk to their inflation goals.
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How are UK consumers faring? Retail sales data to provide clues
Today looks set to be a rather quiet day in financial markets, at least as far as macroeconomic data is concerned. This morning’s UK retail sales report should provide a decent read as to how British consumers are holding up in the challenging environment of ultra-high rates by and elevated inflation. Economists are eyeing a flat reading in the headline sales number, so any positive expansion here could be bullish for GBP. FOMC member Harker will also be speaking today, although his comments will not carry as much weight as those from chair Powell.
We are already casting one eye on developments next week. Aside from any headlines out of the Middle East, Tuesday’s G3 PMI data and Thursday’s US GDP report for Q3 could have an outsized importance for currency markets. An upside surprise in the latter could trigger a fresh wave of dollar buying, and could send the US 10-year Treasury note through 5%, if it hasn’t already got there by then of course.
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