The Morning Update

The USD is steady, oil prices weaken, equity markets are mixed, and US yields ease as the Fed's temper easing timeline. Currency markets are sidelined, while equity markets and US yields slip following Fed Williams comments saying it was too early to begin thinking about lower US borrowing costs. Former FDIC Chair Bair said that the Fed is sparking irrational market optimism over potential rate cuts and said market optimism over the potential for interest rate cuts next year is dangerously overdone. Elsewhere, Egypt's Suez Canal authority said on Sunday it was closely monitoring the impact of tensions in the Red Sea after recent attacks by Yemen's Houthis on vessels in the southern part of the basin. In the last full trading week of 2023, markets will focus on Tuesday's BoJ Interest Rate Decision, the EU Inflation report, and BoC CPI. Wednesday, UK CPI, German PPI, US Consumer Confidence & Existing Home Sales, and BoC Summary of Deliberations. Thursday, US GDP, Initial Jobless Claims, CAD Retail Sales. Friday sees UK GDP, UK Retail Sales, US Core Personal Consumption Expenditures, US Durable Goods, Michigan Consumer Sentiment Index, and CAD GDP report.

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In other news. Nippon Steel is expected to buy US Steel, which is expected to exceed JPY 1 TLN (US$7bln) - Nikkei. BP to pause all oil tanker transits through the Red Sea - Bloomberg. Ukraine's economic recovery depends on extra allied aid, warns IMF chief. North Korea fires ICBM after condemning US 'war' moves. UK bankruptcies soar as high rates and end of COVID aid hit businesses hard. The EU strives to make Hungary's Orban realize the 'full costs' of isolation after Ukraine's veto. China curtails 'dangerous' fighter jet maneuvers after Xi-Biden Summit. In Israel, the US defense chief is to look to the next phase of the Gaza war.

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In currency markets. Currency markets are somewhat sidelined after the Fed attempts to walk back the Fed Chair's comments on lower US interest rates in 2024. JPY slips in early trading ahead of BoJ's interest decision tomorrow. CNY weakens by 0.25%, while Asian currencies are flat on average vs USD. Trading currencies are mixed with ZAR weakening by 0.6%, JPY & MNX down 0.4%, NOK slipping 0.1%, CHF & SEK are up 0.2%, and AUD & NZD are up 0.3% vs. USD.

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In commodity markets. Oil prices weakened by 0.6%, Natural Gas prices rallied by 2.8%, Gold and Silver prices slipped by 0.2%, Copper and Soybean prices weakened by 0.5%, and Wheat prices fell by 1%.

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CAD is holding steady in early trading,  holding 1.3400, as markets digest several Fed policymakers commenting that it is too early to talk about interest rate cuts in 2024. CAD looks vulnerable to further weakness as commodity prices ease and on the prospect that the USD could rebound on Fed comments heading into quieter markets ahead of the Christmas holidays. This week sees several key CAD economic data releases, including the CAD Inflation report on Tuesday, the Retail Sales report on Thursday, and the GDP report on Friday. Today, with the lack of any high-tier data releases in the US and CAD, we expect to see a hold within its current 1.3350-1.3400 trading range.

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EURCAD edges higher in quiet trading as weaker commodity prices put some pressure on the loonie.

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EUR holds steady at 1.0900 without any key US data releases today. Euro is sidelined despite weaker-than-expected German IFO data, which came in below expectations. Over the weekend, hawkish comments from Fed policymakers took the steam out of the Euro, with investors preferring to sit on the sidelines today with the increase of tensions in the Red Sea and the absence of any key US data releases today. Reuters reported the ECB policymakers were likely to consider a policy pivot in March. Intraday, we expect the Euro to hold within its current range, but the single currency appears vulnerable to weakness in the final weeks of 2023.

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GBPEUR underperforms its peers in early trading as investors take profits ahead of the year-end.

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GBP weakened in early trading as increasing tensions in the Red Sea and an increasing number of Fed policymakers walking back Fed Chair interest rate cut comments helped support the USD. The pound slipped in early trading after BoE Broadbent was seen as taking a less hawkish tone on the economy and the direction of UK interest rates into 2024. The focus will be on this week's UK inflation report to help guide interest rates into 2024. Today, we expect the pound to remain capped at 1.2700 and hold within its current range in the absence of any US economic releases.