Morning Brief – Magnifying glasses

Charles Porter
Tue 10 Oct 2023

Magnifying glasses

We have been speaking about a data-driven FX market for some time now. Ever since the scramble to keep up with the global interest rate hiking cycle began to relax, markets have been forced to look towards data for clues regarding the path ahead. Virtually every developed market central bank that has begun to curtail their hiking cycle has emphasised the need to keep interest rates sufficiently high to sustain downward pressure on still-elevated levels of inflation.

For a central bank to say otherwise would be to undermine the very costly and painful hiking cycle they have already begun. In the knowledge that clues will not be forthcoming from central bankers, the usual reliance upon comprehensive forward guidance cannot be expected. One of the only alternatives to populate models is domestic and international data. By utilising data, it is possible to forecast when the statistics targeted by the monetary adjustment may begin to fall. Inflation is of course the obvious target, however, recall the broad mandates of many central banks allowing a consideration for variables including growth and the labour market to be factored into many policy decisions.

What we are observing is traditionally low salience data releases being looked at far more closely than we are accustomed to. As a great example, job openings data was released in the US last week. Typically, this is characterised as one of the lowest salience releases in the calendar not even forecasted by many analysts. Not only is this data point thought to be of limited significance to the economy but each month it is eclipsed only a few days later by a far greater labour market statistic: non-farm payrolls. Despite its usual characterisation, during a volatile session, a modest increase in the number of job openings in the US for the month of August was capable of moving USD higher by around one half of a US cent versus the GB Pound and Euro. The conclusion is that whilst opportunities for price movement finally abound, so too do the risks of unexpected volatility in usually stable pairs. 

Discussion and Analysis by Charles Porter

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