Market Report - 05/12/2024
Turmoil in France as Government collapses ; Dovish Fed weakens the US Dollar
Andrew Bailey’s speech yesterday saw the Pound slip further vs the US Dollar as the Bank of England Governor stated that the MPC were ready to continue their rate cutting cycle from as soon as January 2025.
Whilst Governor Bailey noted that these cuts are expected to be gradual, the process of bringing inflation back below the banks 2% target was well embedded.
In his pre-recorded interview, Bailey told the FT to expect “four interest rate cuts next year as inflation eases”, whilst pointing out the emphasis on the word “gradual” that was used in the MPC’s outlook for interest rates. He remained relatively cautious and explained that whilst the “disinflation process is well embedded” he was insistent that “we have further to travel”.
Whilst money markets are still pricing only 3 rate cuts from the BoE next year, there is potential scope for the Pound to be further sold off as further cuts are priced in. On Wednesday morning, GBPUSD fell to a daily low of 1.2630, however losses were quickly diminished as the pair closed on Wednesday evening north of 1.27 once again.
Another key risk event that took place yesterday, was the S&P Global UK Services Purchasing Managers Index, which showed that Britain's dominant services sector lost steam in November, although not as much as first feared. The survey showed employment in the services sector fell for a second month, although the pace of decline was less marked than in October.
In the Eurozone, there were big developments on the political scene as the French government collapsed, following a no confidence vote. There was overwhelming support from MPs who voted to oust Michel Barnier within just 3 months of being appointed by President Macron. Both sides of the political spectrum were aligned in motioning no-confidence votes, including the party of Marine Le Pen who said there was “no other solution” than to remove centrist Barnier.
The former Brexit negotiator is now obliged to present his resignation of his government and his budget, which he very controversially tried to usher in, without a vote – which some suggest was the catalyst for the no confidence vote. This marks the first time the French government has collapsed in a no confidence vote since 1962.
President Macron will now need to find a replacement, but even when he does find a successor, parliament will remain divided - this further adds to the political instability in France following snap elections in the summer which led to a situation with no party having a majority in parliament. Despite this, the Euro has shown some resilience amongst the turmoil but with the government now toppled in France, concern will no doubt spread across Europe with both 2 powerhouses of the Eurozone (Germany and France) facing real difficulty on both political and economic fronts.
In the States, Federal Reserve Chair Jerome Powell spoke around 6:45pm GMT on Wednesday evening; Powell noted the U.S. economy is "in remarkably good shape", and the growth has been better than previously forecasted He added that he feels "very good about where the economy is and where monetary policy is". Additionally, the Fed "can afford to be a little more cautious as we try to find neutral".
The comments align with market expectations that the Fed will cut interest rates on a handful of occasions in 2025, possibly following the interpretation of the BoE where they are forecasting 4 cuts, as aforementioned. This represents a sharp shift from just three months ago, when the Fed was expected to initiate a more aggressive cycle of rate cuts. The steady shift in expectations has been the driving force behind a strong rally in the Dollar, along with Trumps re-election.
In this morning’s trading session, GBP/USD has surged to a weekly high of 1.2740 following the Fed’s dovish stance from last night. The FOMC is now odds-on to cut interest rates again in December. Market pricing shows a 77% expectation for such a move, up from approximately 45% at the start of the week. The shift to favour a December move follows a softer-than-forecast U.S. ISM Services PMI reading, which showed a sharp slowdown in growth from October to November
Next up on the agenda for this week will be the eagerly awaited release of US Non-Farm Payroll data which is due out on Friday on 13:30 GMT. This payroll report will likely follow suit of the ADP payroll report which was released on Wednesday – and is often one of the main drivers for USD volatility in the first week of every month. Elsewhere, we have EU GDP data & UK Housing Index data.