Written by Convera’s Market Insights team

Betting on lower volatility and interest rates

Boris Kovacevic – Global Macro Strategist

U.S. stocks just had their best week of the year and are now about 5% below their previous record set in July. The 11% rise in the Nasdaq index was fueled by a positive macro news flow that calmed recession fears and the unwinding of the FX carry trade of short-selling the yen, which appeared to be running out. This has helped stabilize risk sentiment and bond yields across the developed world, giving investors another chance to buy on dips. The positive risk sentiment pushed the greenback into its fourth consecutive weekly decline, as the U.S. dollar index has now lost 3.5% of its value since the start of the second half of 2024.

Inflation in the US continues to ease, initial jobless claims came in lower than expected, retail sales posted their best month this year in July, and consumer confidence rose for the first time in five months. All of these positive headlines contributed to bullish risk sentiment last week. Investors focused on the disinflation story and the risk rally and sold the dollar, ignoring the lower probability of a recession that usually favors the greenback. One way to understand this development is through the lens of Fed funds futures. While stronger macro data increased the likelihood of a 25 basis point rate cut in September (up from 50 basis points), rate cuts of around 175 basis points are being priced in over the next 12 months. This significant expectation of looser monetary policy has weighed on the dollar.

Jerome Powell’s speech at the key Jackson Hole Symposium later this week will shed some more light on the Fed’s views on the latest data. Options markets are pricing in a swing of over 1% in the US stock index (S&P 500) due to the speech scheduled for Friday. The question has recently shifted from whether the Fed will cut rates in September to how much it will cut them by. Powell needs to reinforce this message for risky assets to continue to rise. Investors have bought into the idea of ​​impending rate cuts and are betting on falling volatility. Central banks’ data dependence puts upcoming macro data in the spotlight.

Betting on lower volatility and interest rates

Boris Kovacevic – Global Macro Strategist

The British pound took just a week to recover its losses of the past three weeks as GBP/USD rose 1.4% last week. The currency pair’s fourth-best session this year was driven by continued falling inflation in the United States and the UK economy performing better than expected.

Bond yields in the US are falling faster, causing the interest rate differential to shift in favour of the pound. Investors are now getting a higher return by investing in UK 10-year government bonds than by holding US Treasuries for the first time since last September. This is seen as one of the reasons GBP/USD is returning to the high levels of $1.29, with $1.30 clearly in sight.

From a macroeconomic perspective, August is already over for the UK as all data was released last week. Retail sales, GDP and jobs data all surprised on the upside while inflation rose at a slower than expected rate. This will be welcome news for the Bank of England as it tries to engineer a soft landing and leaves the next interest rate decision hanging in the balance. The positive news is likely to continue for some time to come and support the pound. However, it will depend on the US data whether the currency pair is moved one way or the other.

Euro fluctuates near 2024 high

Ruta Prieskienyte – Chief FX Strategist

The euro has benefited from a recent resurgence in risk appetite, even as investors recalibrate expectations for a significant easing of monetary policy by the US Federal Reserve in 2024. Positive US economic data has eased concerns about a rapidly deteriorating US forecast, which, together with renewed risk appetite and improved market stability, has pushed EUR/USD close to 2024 highs.

Domestic growth continues to be supported mainly by the services sector, while manufacturing continues to struggle and industrial production is falling sharply. Recent indicators such as Germany’s ZEW survey have deteriorated, reflecting increasing uncertainty and concern about global events. Despite these problems, investors are focusing more on developments in the US and Fed expectations

This week’s negotiated wage data could shift the focus to the ECB, as this metric is crucial for the Governing Council when considering future rate cuts. Recent data from Italy has shown continued upward pressure on wages, and if this trend is reflected in the broader eurozone figures, it could challenge expectations of an ECB rate cut in September and potentially strengthen the euro. The preliminary PMIs for August, due later this week, will also be important to gauge growth momentum. Further signs of deterioration could take some of the shine off the euro.

JPY extends losses as US beats expectations

Table: 7-day currency trends and trading ranges

Major global risk events

Calendar: 19-23 August

All times are in BST

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*Published exchange rates are provided by Convera’s Market Insights team for research purposes only. Rates are from a unique source and may not match live exchange rates quoted on other websites. They are not an indication of actual buy/sell rates or a financial offer.