Powell Keeps Market Cautious On The Fed

GBP/EUR outlook remains soft

UK GDP is a bit disappointing, owing to a surprise fall in activity during September. The 0.1% third-quarter figure is a far cry from the 0.7% and 0.5% in the first and second quarters. Does that show the economy has slowed? Yes, but not as much as the figures suggest. A lot of that strength seen in the first half of the year was in non-tradable and non-consumer sectors that have less to do with underlying economic fundamentals. The Bank of England has agreed that the true rate of growth was probably slower in the first half. However traders think the BoE/consensus forecast for the winter is a bit high, and while real wage growth should generate higher GDP, the pace is set to be fairly moderate in the near term before receiving a bit of a budget boost next year

GDP was a bit weaker than expected, but it's still not that surprising, particularly given the volatility in the recent data. The BoE is much more focused on the services inflation figures that we'll get next week. In the near-term, they're likely to remain sticky around 5%. Barring a downside surprise, markets think a pause in December is the most likely outcome.

GBP/EUR has hovered just above €1.2000 as a wide rate differential continues to put pressure on the pair. Given traders see a low probability of the BoE cutting in December while economists call is for a 50bp move by the ECB next month.

No Major Data

Key support at $1.0500

EUR/USD tested $1.0500 yesterday and then briefly rebounded before coming under pressure again around the $1.0580 area. Intraday volatility will likely be the norm for coming days due to a stretched long Dollar positioning, but it is clear that the momentum on EUR/USD remains bearish and investors will remain attracted to selling the rallies.

The minutes of the October European Central Bank minutes showed an ongoing debate about the disinflationary trend, and some hawkish members were reluctant to go for a rate cut that was described as a “risk management” move. There is a clear shift from inflation to growth concerns in the Governing Council, but no indications of a strong consensus for an acceleration in easing. Traders views remains that a 50bp move in December remains very much possible, and it's expect a bearish impact on the Euro given markets are pricing in just over 30bp.

Today, we’ll hear from Fabio Panetta, Philip Lane and Piero Cipollone, three dovish-leaning members. The $1.0500 level is a key one for the Dollar and economists can probably expect good support also considering the positioning picture. 

No Major Data

Moderately hawkish remarks by Powell

The Dollar is testing the limit of stretched positioning, but macro developments have so far failed to offer any real catalyst for a substantial unwinding of the greenback’s longs. The set of inflation figures for October have kept markets somewhat reticent to fully price in a December cut from the Federal Reserve, as both CPI and PPI’s core measures have printed at 0.3% month-on-month. That is simply too hot for the Fed to turn the dial to a more dovish narrative.

And indeed the remarks by Fed Chair Jerome Powell in Dallas yesterday seemed to endorse markets’ cautious pricing on Fed easing, giving some support to the Dollar towards the end of the New York session. Powell seemed to put greater emphasis on the strength of the economy and how that allows the central bank to approach the upcoming policy decisions “carefully”. Market expectations for a cut in December declined by around 5bp after his comments and are now at 15bp.

Today, there is another chance for a Dollar positioning-led correction as retail sales for October are published. Consensus is for a marginal slowdown across all retail sales indices compared to September, while still remaining in positive MoM territory. It probably won’t take much to trigger a negative Dollar reaction, but the recent momentum has been rather strong in US data.

Data: Retail Sales 13:30