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In the current market scenario, equities exhibit a mixed performance, characterized by narrow ranges, while the foreign exchange (FX) market experiences a temporary stall as participants eagerly await additional data. The prevailing belief is that the vulnerability of the USD to weakening US data is diminishing, with the possibility that any further deterioration in demand-side data could signal a slowdown, adversely impacting equities and influencing risk sentiment, ultimately bolstering the USD.
The European data landscape also plays a significant role in this equation, where any indications of soft data in the European Union (EU) or the United Kingdom (UK) could pose challenges for the Euro (EUR) or the British Pound (GBP). The EU's growth outlook remains challenging, and the potential reaction to softer Consumer Price Index (CPI) data later in the week could trigger a more conventional cyclical response: a dovish stance on interest rates and a subsequent decline in the EUR. Thus, the overall assessment suggests that achieving further upside for the EUR in the near term may be arduous.
On the global economic front, the speeches by Fed hawks Chris Waller and Michelle Bowman later in the day add a layer of anticipation, while oil prices have rebounded following three consecutive losing sessions, driven by the prospect of additional production cuts from OPEC+ at their upcoming meeting on November 30.
Turning our focus to the specific currency pairs, EUR-USD maintains a stable position following a slight improvement in German consumer confidence. Despite the German December GfK Consumer Confidence measure lingering in negative territory, the marginal improvement to -27.8 from -28.3, albeit slightly better than anticipated, suggests a nuanced economic landscape. However, the EUR faces challenges in sustaining upward momentum, as yield spreads indicate a potential correction, with EUR-USD deemed overextended at current levels, possibly aligning more closely with 1.07.
Meanwhile, AUD-USD has exhibited resilience, disregarding a below-consensus retail sales print. The Australian economy grapples with tepid household spending, attributed in part to the 425 basis points of rate hikes by the Reserve Bank of Australia (RBA), which continue to exert a dampening effect on demand. Despite October's unexpected contraction of -0.2% MoM in retail sales (against a consensus expectation of +0.1%), the AUD strengthened. This resilience can be attributed to a modest overnight boost in risk sentiment and the weaker US Dollar Index (DXY), overshadowing the subpar economic data.
RBA Governor Michele Bullock's hawkish remarks ahead of the upcoming policy meeting also contributed to the AUD's strength. She highlighted the central bank's challenges in managing a slightly stronger-than-expected demand in the economy, coupled with persistent stickiness in services inflation. However, with the October CPI data in focus, there is a cautious outlook, with HSBC economists anticipating a dip in price pressures from 5.6% YoY in September to 4.9% YoY, potentially deviating from the market's expectation of a 5.2% increase. This suggests limited room for further appreciation of the AUD in the immediate future.
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