Dollar softer again

The dollar continued to weaken against the euro and sterling yesterday, as ECB and BoE speakers push back against market pricing of interest rate cuts by mid-2024. The dollar trades at $1.095 to the euro and $1.253 to sterling this morning.

Interest rate markets continue to price in significant rate cuts next year for the G3 central banks. Close to 100bps of cuts are priced for the Fed and the ECB in 2024, with more than a 50% chance of a first cut in Q2. Longer term sovereign bond yields have stabilised somewhat in both jurisdictions, 50bps-60bps below last month’s peak.

Oil prices have rebounded in the early part of this week following a 17% fall from mid-Oct. Brent has gained almost 9% since late last week, and currently trades just below $82p/b. European gas prices also rallied in the early part of the week following reports of a vessel seizure by Iran-back Houthi rebels in the Red Sea.

ECB and BoE speakers delivered hawkish messaging over the past few days, pushing back against market pricing of 2024 rate cuts and declines in long-end yields. Belgian Central Banker Pierre Wunsch said that markets bets on rate cuts – which has resulted in an easing of financial conditions – risk prompting another ECB hike, while this morning BoE Governor Bailey said that UK interest rates may have to rise again given the current levels of inflation and wage growth in the UK.

Focus in markets today is on the Fed minutes released this evening, with ECB president Lagarde and hawkish council member Schnabel due to speak after the close.