Where will further volatility come from?
We have once again entered into a period characterised by data-driven market moves. Markets until only recently seemed comfortable with how future dated contracts had been priced. This was true of most assets from FX forwards, volatility indices including the VIX, equities and treasuries. Despite most developed economies having deeply inverted yield curves signalling enduring recession risks, market pricing at least had stabilised, albeit within a pessimistic equilibrium. Since data surprises in the United States and the Eurozone, that equilibrium has been disturbed.
The catalyst provided to US data was to challenge the market’s view that US yields were due to peak. The June pause widely expected by the Fed had allowed further hikes to be priced out of the curve once again. However, particularly strong economic data from the USA forced investors to question whether robust US fundamentals would sustain still above-target inflation levels. Rising front-end rates translated within FX into stronger long-USD forward points and in the case of some currency pairs it has delayed the point at which forward curve inversion takes place. This will change forecasts for H2 and beyond as investors adjust to the costs of relative currency plays.
The opposite disturbance has undermined the terminal rate in the Eurozone. Weak data, beginning with PMIs within core eurozone economies forced investors to question whether the ECB could afford, and from a more optimistic lens would even need, to raise rates to the degree previously expected. The disturbances created within market pricing by even low-salience data readings has left investors looking more closely than ever at data release dates. As recently as yesterday, ISM manufacturing, construction and services data brought volatility within USD. Yesterday’s price action confirms that the major source of risk and volatility for the short term outlook will be within data.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Daily Brief – Reckoning Days
Charles Porter
Tue 14 Jan 2025
Reckoning Days Despite it being less than one week until Donald Trump’s inauguration, markets are still fixated on the evolution of the UK’s bond market and its currency. The Chancellor may well have been hoping for some distracting headlines from the incoming President-elect. Unfortunately for her, those that have come from the Trump administration and […]
Daily Brief – Germany
Humphrey Percy
Fri 17 Jan 2025
Germany In just 6 weeks Germany will vote and while Chancellor Scholz thinks that he can win, most others are equally convinced that he cannot based on his economic record alone that has seen the German economy contract by 0.3% in 2023 and by an estimated 0.2% in 2024. That on top of his ability […]
Daily Brief – Markets In Reverse – Inflation to the Rescue
Charles Porter
Thu 16 Jan 2025
Markets In Reverse – Inflation to the Rescue Particularly in the case of the beleaguered GB Pound, it may be time to do away with the textbook. Instead of attracting further demand as UK yields have risen, GBP has registered one of its worst starts to a year on record. It is a narrative of […]
