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BOE eyeing interest rates after labour market tightens

Posted: 17th November 2021

Daily market report November 17th 2021

Market highlights.

  • US retail sales data was stronger than expected which boosted confidence in the US outlook.
  • US bond yields moved higher following the data with a 3-week high for the 10-year yield.
  • Wall Street equities posted gains despite higher yields with optimism over earnings.
  • Asian equities, however, had a negative bias on earnings reservations.
  • The dollar posted further gains to a fresh 16-month high on yield grounds.
  • The Euro remained vulnerable on dovish ECB expectations, especially with coronavirus reservations.
  • EUR/USD retreated further to 16-month lows near 1.1260 before a tentative recovery.
  • The yen remained under pressure with USD/JPY at the highest level for over four years near 115.00.
  • Sterling posted net gains on increased speculation over a Bank of England rate hike after strong inflation data with EUR/GBP at 20-month lows.
  • Commodity currencies were dragged lower by the strong dollar.
  • Oil prices were resilient, but capped by demand reservations.
  • Precious metals moved lower as the dollar strengthened, but with solid demand on dips.
  • Bitcoin lost further ground with a 2-week low below $60,000.

EUR/USD

The Euro was unable to secure a significant recovery ahead of Tuesday’s New York open with expectations of a very dovish ECB policy continuing to sap underlying support. On-going concerns surrounding coronavirus tends and renewed upward pressure on gas prices also undermined confidence.

Headline US retail sales increased 1.7% for October, above consensus forecasts of 1.2% and there was a marginal upward revision for September to 0.8% from 0.7%.

There was a 1.8% increase for auto sales on the month with a strong 3.8% increase in electronics goods.

Underlying sales increased 1.7% for the month, also above market expectations of 1.0% while there was a 1.6% monthly increase in the control group. The data boosted confidence in the outlook, especially as it tended to ease potential worries triggered by the sustained decline in consumer confidence, although sales will be boosted by higher prices. Import prices increased 1.2% for October with a 10.7% increase over the year as fuel price imports posted an annual increase of close to 87%.

The dollar secured a net advance following the data and maintained traction into the European close to post a fresh 16-month high. Commodity currencies lost ground and EUR/USD retreated to fresh 16-month lows around 1.1320. The dollar strengthened further in Asia on Wednesday with EUR/USD sliding to fresh 16-month lows around 1.1265 before a recovery to around 1.1300 with central bank policy trends remaining a key market focus.

USD/JPY

There was a stronger than expected rebound of 1.6% in US industrial production  after a 1.3% decline the previous month with a strong rebound in capacity use.

The NAHB housing index strengthened to 83 for October from 80 the previous month, maintaining confidence in the construction sector.

Treasury Secretary Yellen stated that inflation might subside by the second half of 2022, although the underlying tone was significantly less confident than previously. Inflation developments continued to have a significant impact on the political debate with pressure for the Administration to take action.

Markets continued to monitor any announcement on whether Fed Chair Powell would be nominated for a second term.  The yen was unable to make any headway on the crosses and USD/JPY posted a solid net advance to around 114.65 at the European close as the 10-year yield held close to 3-week highs.

San Francisco Fed President Daly maintained a dovish tone with comments that patience is the best action and that it is better to wait for greater clarity rather than raise rates pre-emptively. She added that raising rates now would not fix high inflation, but would slow the recovery.

Asian equities were again mixed amid reservations surrounding the Chinese outlook while USD/JPY advanced to a 56-month high near the 115.00 level.

Sterling

Sterling continued to make headway in European trading on Tuesday with confidence underpinned by the latest labour-market data. The data overall suggested that the labour market had tightened further and, given that the Bank of England had wanted evidence of labour-market strength before sanctioning an increase in interest rates, there were increased expectations that the central bank would move to tighten in December.

Domestic yields increased which provided net support for the UK currency and overall risk appetite held steady which helped underpin sentiment.

GBP/USD was unable to hold above 1.3450 given the strong dollar and drifted lower as the US currency posted further net gains, but there were notable advances on the main crosses. In this environment, EUR/GBP retreated to lows just below 0.8430.

The latest UK CPI inflation data recorded a sharp increase in the headline rate to 4.2% from 3.1% previously and above consensus forecasts of 3.9%. This was the strongest reading since the beginning of 2012 and the core rate also increased to 3.4% from 2.9%.

The data increased expectations that the Bank of England would raise rates at the December meeting. GBP/USD strengthened to near 1.3450 with EUR/GBP at 20-month lows close to 0.8400.

Swiss franc

The Swiss franc lost ground on Tuesday with EUR/CHF recovering some ground after the ability to hold support just above 1.0500. There was also speculation that the National Bank would intervene more aggressively, although there was still a lack of conviction that this determination would hold over the medium term.

EUR/CHF was unable to hold the 1.0550 area and retreated to 1.0530 while USD/CHF posted a strong advance to highs just above 0.9300.

The Franc continued to out-perform the Japanese yen, although USD/CHF posted a fresh advance to 6-week highs around 0.9320.

AUD/USD + USD/CAD

The Australian dollar failed to make headway in early Europe on Tuesday and gradually lost ground as the US dollar secured wider support across the board.

In this environment, AUD/USD weakened to lows close to 0.7300 after the European close.

There were further losses to lows around 0.7265 as US dollar strength was amplified by further attempts from the Reserve Bank to push back against market interest rate expectations.

There was a tentative recovery to 0.7295 at the European open as domestic sentiment held steady.

The Canadian dollar was able to demonstrate resilience on Tuesday, but gradually lost ground as wider US dollar strength dominated and USD/CAD strengthened to above 1.2550.

Bank of Canada Deputy Governor Schembri dampened expectations of an early increase in interest rates with USD/CAD peaking around 1.2585 before a correction to 1.2550 on Wednesday.

NOK+ SEK

The Norwegian krone was able to secure a limited net advance on Tuesday with the scope for wider gains limited by expectations that the currency would lose net support on seasonal grounds.

Overall, EUR/NOK edged lower to 9.89 before trading around 9.90 on Wednesday with USD/NOK just below 8.75.

The Swedish krona was undermined seasonal expectations with reservations over domestic coronavirus developments also a negative factor and EUR/SEK posted significant gains to a peak around 10.08. USD/SEK traded close to 8.90 from 12-month highs around 8.93.

Equities

Euro-zone equities were able to make further headway on Tuesday with underlying optimism over the earnings outlook as well as expectations of a very accommodative ECB policy.

The German DAX index posted a 0.6% advance with the Euostoxx 50 index posted a 0.35% advance to a fresh record high.

Major UK stocks were unable to make headway on Tuesday with confidence undermined by increased speculation that the Bank of England would raise interest rates. With Sterling posting gains, the FTSE 100 index declined 0.35%.

Wall Street equities were boosted by the stronger than expected retail sales data and there was further optimism over earnings trends despite inflation pressures with the S&P 500 index posting a 0.4% advance.

Trends were again mixed in Asia on Wednesday with a negative bias.

Japan’s Nikkei 225 index declined 0.4% despite dollar strength while the Australian ASX index retreated 0.65%.

China’s Shanghai index gained 0.4% with Hong Kong’s Hang Seng index 0.6% lower in late trading

Commodities

There was a more mixed tone in oil prices during Tuesday with expectations of tight inventories offset by concerns over a potential lack of demand.

The positive impact of robust US retail sales data was also offset by the impact of dollar strength.

WTI dipped to lows around $80.00 p/b before a recovery to near $81.0 p/b.

API data recorded a smaller than expected inventory build of 0.7mn barrels and there was a substantial gasoline draw.

Oil prices were unable to make headway, however, with January crude around $79.25 p/b on Wednesday with Brent around $81.90 p/b.

Precious metals initially made headway on Tuesday with support from inflation concerns, but were then undermined by the impact of dollar strength and higher US yields.

Gold retreated to near $1,850 per ounce while silver dipped to lows near $24.80 per ounce.

Metals were resilient on Wednesday with gold close to $1,855 per ounce and silver recovering to near $25.00 per ounce.

Cryptocurrencies

Cryptocurrencies were unable to regain territory during Tuesday, although the overall rate of losses did slow.

There was a negative impact from dollar strength and higher bond yields with reservations over the regulatory environment also a key element in undermining confidence.

Bitcoin dipped sharply to 2-week lows below $59,000 before a limited recovery. Volatility eased on Wednesday with bitcoin trading just below $59,500.

Ether also dipped sharply to lows near $4,100 before a recovery to near $4,150.

Calendar

Major events for the day ahead: (times in GMT)

13.30: Canada consumer prices

 

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