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USD: Ukraine news not boosting safe havens for now

Global markets have been shaken by a sudden escalation in the Russia-Ukraine conflict after Ukraine used US-supplied long-range missiles for a strike in Russian territory and Moscow lowered the threshold for response using nuclear weapons. So far, this has translated to some noise in the FX market, but no big moves. We suspect the dynamics in dollar crosses were partly still affected by the dollar’s overbought positioning status, which may have contributed to curbing geopolitics-related gains. At the same time, the other two safe havens JPY and CHF only experienced brief and limited support yesterday. USD/JPY broke above 155.0 again this morning.

In other words, markets seem to be cautiously leaning towards a sanguine view on Ukraine, meaning any further escalations should have a much deeper impact on FX. European currencies (excluding CHF) are inevitably the most vulnerable, whereas high-beta currencies that are geographically far from the conflict (like CAD or AUD) should only be affected indirectly through risk-off. The oversold JPY probably has the highest upside potential from an escalation.

The US calendar is still quiet and the only focus today will be on a few Fed speakers, including the dovish-leaning Barr and Cook and the more neutral Williams and Collins. An interesting development on the macro side, however, was yesterday’s release of state payrolls, which allows us to calculate the actual impact of the hurricane on the soft October country-wide print (12k). Our US economist crunched the numbers and estimates that the payroll figure would have been around 121k without the hurricane and strike activities. We expect at least 100k of “technical” rebound in the November payroll print, which raises the bar for a hawkish surprise from the Fed.  

We recently highlighted the potential for a positioning-driven dollar correction. With the recent increase in geopolitical risk, it appears that the risks for the dollar are now more balanced, and we may see less resistance to a fresh leg higher in the greenback.

EUR: Wage data due today

ECB member Fabio Panetta made headlines yesterday with some dovish remarks. He is one if not the most vocal Governing Council doves, so no surprise there, although it’s significant how he explicitly laid out the role that the ECB should have in supporting eurozone growth. We have a more dovish view on the ECB compared to market pricing exactly because we believe this shift in focus from inflation to growth will lead to faster easing in light of a stagnant activity picture.

Today, the ECB releases 3Q data for negotiated wages. This used to be a key input for policy decisions but has lost significance given the greater confidence in the disinflation path. A re-acceleration in wages from the 3.5% of 2Q can offer a counterargument for the hawks, but we suspect some pretty substantial surprise would be needed to heavily affect ECB pricing and the euro.

We had expected EUR/USD to find some short-term support, but we now see renewed downside risks given a still wide rate gap and geopolitical risks. Our expectation is that 1.050 can be tested again soon, and by the end of the year we can see a break lower.  

GBP: Inflation data confirms December cut unlikely

GBP/USD has broken past the 1.270 level this morning after a slightly hotter-than-expected UK CPI print for October. We know that the Bank of England's focus is on services inflation, so the rise in headline and core CPI to 2.3% and 3.3% is not really relevant. CPI services did accelerate from 4.9% to 5.0%, which is in line with the BoE and our own forecast. A lot of that acceleration is, however, down to components such as airfares and rents that the BoE deems less indicative of persistent inflation. Our economist’s estimate of “core services” inflation saw a deceleration from 4.8% to 4.5% in October.

That is, however, still insufficient to prompt a cut in December, in our view. Even if there is another inflation print before the next BoE meeting, we would probably need a sharp slowdown in services inflation to put a cut back on the table. Our house view is that services CPI will keep bouncing around 5% for the next four months and only turn decisively lower from 2Q25, when we expect the BoE to accelerate the pace of monetary easing.

We currently see the next BoE cut in February, which isn’t fully priced in (19bp). We think there will be room for a dovish repricing to negatively affect sterling next year, but the policy gap with a dovish ECB will hardly be closed and we remain generally negative on EUR/GBP. For the short term, we stick with our call that the pair will move back below 0.830.

HUF: Hawkishness with cracks

As expected, yesterday's National Bank of Hungary meeting did not bring any changes. The central bank tried to send a hawkish signal but did not commit too much. Of course, the main reason is the EUR/HUF level and the volatility of the Hungarian market. The initial market reaction suggested a stronger HUF, however the mention of one vote for a rate cut reversed the direction again and EUR/HUF ended the day higher above 408. As we've mentioned previously, much of the reason behind the FX weakness is not in the hands of NBH but is directed at the global story.

The pressure on FX, as in the rest of the CEE region, is here to stay for longer in our view. So NBH will just have to wait a longer. Rate cuts are of course postponed indefinitely regardless of dovish data from the economy. We believe EUR/HUF will be drawn further towards the 410 level and possibly move higher should global markets come under pressure. Until then, we will likely see NBH wait until next year and do nothing. At the same time, yesterday's escalation of the Ukraine-Russia conflict shows the vulnerability of the situation and clearly the divergence between Europe and the US after the election shows nothing positive for the CEE region which increases the risks of further selling here.

Above: GBP/USD at 1-minute intervals showing the post-CPI release spike.

Source: Poundsterlinglive

Markets

Markets were on an emotional rollercoaster yesterday. The first Ukrainian use of US-made long range ATACMS missiles pushed Russian President Putin into signing off a revised nuclear doctrine. It now includes a possibility of a nuclear response to aggression by non-nuclear states that are supported by other nuclear powers. European stocks lost around 1.5% and hit an intraday bottom (-2%) after Russian minister of foreign affairs Lavrov called it a “signal of escalation”. European stock markets eventually recovered to closing losses of somewhat less than 1% after that same minister tried to calm worries over a nuclear escalation. “We are strongly in favor of doing everything not to allow nuclear war to happen. A nuclear weapon is first and foremost a weapon to prevent any nuclear war.” Haven assets mirrored the intraday sell-off/recovery from equities.

German yields ended around 3.5 bps lower across the curve but traded with losses of up to 10 bps. US yields lost up to 2.8 bps in a bull flattening move. EUR/USD closed unchanged just below 1.06, but set an intraday bottom around 1.0530. US stock markets turned starting losses into closing gains (S&P & Nasdaq), mainly thanks to a near 5% increase in Nvidia shares going into tonight earnings from the company. The outcome will influence general market/risk sentiment and could set the tone going into year-end.

EMU Q3 negotiated wage data are today’s economic highlight. Annualized wage growth remained between 4.3% and 4.7% from Q1 2023 to Q1 2024. Last quarter’s decline to 3.5% was welcomed by the ECB in its inflation fight, but remains way above the central bank’s 2% inflation target. ECB Lagarde indicated that forward-looking wage trackers point to a an easing of pay growth in 2025 which she hopes to see reflected in today’s numbers. While a further deceleration is likely, we don’t think they will give sufficient confidence for the ECB to accelerate from 25 bps rate cuts to a 50 bps move in December. It could extend the short term bottoming-out process in EUR rates given that EMU money market still attach a small probability to such a scenario.

UK headline inflation accelerated slightly more than expected in October, by 0.6% M/M to 2.3% Y/Y. Core CPI remained stronger as well, rising by 0.4% M/M to 3.3% Y/Y (from 3.2%). Services CPI ticked up from 4.9% Y/Y to 5%. Today’s figures add strength to the Bank of England’s “not too many, not too much” rhetoric. Sterling strengthens marginally in a first reaction, from EUR/GBP 0.8350 to 0.8330.

News & Views

Hungary’s central bank (MNB) kept the policy rate unchanged at 6.5% yesterday. One dissenter voted for a rate decrease, potentially inspired by disappointing Q3 growth and the recent sharper-than-expected inflation decline. The MNB noted that this indicates lower inflation in the short term. But the “exchange rate depreciation seen in the past months as well as changes to the system of excise duties are likely to have inflationary effects in the next year.” The Monetary Council said the increase in risk aversion towards emerging markets was driven by geopolitics and changing growth and central bank expectations of developed economies. The MNB said these developments pose an upside risk to domestic inflation and considered a pause in the cutting cycle appropriate. “Looking ahead, a careful and patient approach to monetary policy is still warranted.”, the statement still says. Its deputy governor in the press conference afterwards stressed the importance of anchoring inflation expectations, which for households are “significantly” above the central bank’s 3% target range. He stuck to earlier guidance of maintaining the current policy rate for a “sustained period”. The Hungarian forint ended yesterday lower against the euro. EUR/HUF closed at 408.3. Hungarian swap yields dropped some 5 bps across the curve, be it in a pre-meeting move.

Austria is expected to give Romania and Bulgaria full accession to Europe’s Schengen zone, the FT reported. Air and maritime checks were already abandoned since end-March but Austria insisted on land border controls because of concerns over irregular migration. It is now ready to drop its veto after Romania and Bulgaria increased security checks, resulting in lower asylum applications and irregular migration. Barring a change-of-mind of the Dutch government, which gave green light in 2023 but now has the far-right Freedom party in the coalition, the matter can be formalized at the next EU home affairs meeting Dec 12. All restrictions may then be lifted at the start of 2025.

Source: ACTIONFOREX