Sovereign International Daily Market Report
Bond market turmoil triggers violent currency moves
Currencies remained highly volatility on Thursday as investors reacted to the ongoing rout in global fixed income markets.
Highlights:
Government bonds have sold-off across the board so far this week, sending yields sharply higher. In the US, some strong economic data and fears that Trump 2.0 would lead to higher inflation for longer have boosted Treasury yields (the 10-year yield has jumped to near 14-month highs) and the US dollar, which has risen in each of the last three trading sessions.
The most acute moves have been seen in the UK, however, with fears surrounding the Labour government’s fiscal plans sending long-dated gilt yields to multi-year highs - the 10-year gilt yield has spiked to 2008 highs above 4.9% this week, a move of around 40 basis points year-to-date.
The extreme gyrations in UK fixed income markets has been reflected in sterling, which has tanked to a one-year low below on the dollar. Ordinarily, high yields would be reflected in a stronger currency, but fears over the outlook for the UK economy and public finances are clearly taking over, and we would not rule out fresh downside in GBP as a result.
USD
US bond traders took a little bit of a breather yesterday, with the recent relentless sell-off in Treasuries pausing for a day. All eyes on Friday will likely be on the December nonfarm payrolls report. Recent economic news out of the US has been largely encouraging, and economists are bracing for another solid, if not spectacular, report this afternoon.
Consensus is for a job creation number around the 160k mark. As mentioned in our weekly report, focus may be on the monthly wage number, which will likely be of more interest for FOMC officials. Another annual print around the 4% level seems on the cards, with economists expecting a monthly number of +0.3%. Yet, with the FOMC making clear to markets that it is in no rush to continue cutting rates, we suspect that even a really weak report won’t change things too much for the Fed, and could have a relatively minimal impact on the dollar.
EUR
A day of relative calm in European bond markets ensured that EUR/USD traded within a very narrow range on Thursday. The main pair remains lower for the week, however, despite some relatively encouraging economic news out of the common bloc. That includes Monday’s PMI data, which was revised modestly higher for December, and Tuesday’s November unemployment figure, which unexpectedly remained unchanged at a record low 6.3%. Thursday’s retail sales report was slightly less positive (+0.1% MoM vs. +0.4%), although this was largely overlooked by currency traders.
领英推荐
We will have to wait until the second half of next week for the next tier-1 economic reports out of the common bloc. In the meantime, the euro will be driven almost entirely by developments elsewhere, notably this afternoon’s US payrolls report.
GBP
The pound sold-off again yesterday, posting its worst three-day move in nearly two years, as investors continued to fret over the rout in UK bond markets. While part of the move can be ascribed to the fixed income sell-off globally, the gyrations seen in UK gilts have been extreme, partly a consequence of recent disappointing economic news and fears over the state of public finances post the Autumn Budget. This is a damning indictment of Labour’s fiscal policies, particularly the hike to employer NI contributions, which businesses have already warned will lead to higher prices and a worsening in labour market conditions.
We see wide ranging repercussions of this bond market sell-off. On the one hand, weak demand for UK debt raises the risk of either government spending cuts or further tax hikes to balance the country’s finances, neither of which would be positive for growth. Elevated gilt yields are also likely to be reflected in higher mortgage rates, which would provide a further squeeze on household disposable incomes. These worries have placed a high premium on UK assets, and we would not rule out additional downside for sterling as a result.
Economic Calendar - 10/01/2025
Friday (10/01)
Market Report provided by Ebury
Please contact us for any FX needs you may have +44(0)203 817 3700 / [email protected]
Whether you are a large corporate trading millions on a weekly basis, a small to medium sized enterprise trading tens of thousands on a monthly basis, or just a private individual with a one-off amount to transact for a property purchase or overseas investment, we will provide you with the most simple, cost effective route for your foreign exchange payments.
#FX #SovereignInternational #Ebury #MarketReport #Brexit #EconomicData #ForeignExchange #Currency #CurrencyExchange #CurrencyTrading #MoneyMarkets #Finance #InternationalPayments