The Morning Update

The USD edges higher, oil prices strengthen, equity markets are mixed, and US yields ease as rate-cut bets build. The UK core consumer price index dropped beyond expectations from 5.7% in October to 5.1% in November, boosting the case for the Bank of England to ease interest rates in 2024. Equity markets paused as investors balanced the prospect of interest rate cuts in 2024 with softer inflation data versus the risk of an economic downturn. The attacks in the Red Sea are driving up oil prices while increasing inflation risk to the global economy with higher shipping costs and longer delivery times. In focus today is the US Consumer Confidence, Existing Home Sales, Fed's Goolsbee speech, ECB's Lane speech, EUR Consumer Confidence, and CAD BoC Summary of Deliberations will help provide intraday direction to the currency markets.

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In other news. FedEx shares tumble 9% after demand hit revenue outlook. UK inflation slide fuel rate cut bets and jolts markets. Tesla drivers had the highest accident rate, and BMW drivers had the most DUIs, study finds. Red Sea chaos has shippers bracing for weeks without crucial trade routes. The UK house prices fell in October by the most since 2011. Canada laid out a plan to phase out sales of gas-powered cars and trucks by 2035. US Senate leaders admit to deadlock on Ukraine war aid. The EU agrees to new rules on hosting migrants and seeks to cut numbers.

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In currency markets. GBP drops after sharp fall in UK Inflation. USD holds steady as geopolitical issues see investors returning to the safe-haven greenback. AUD & NZD test fresh 5-month highs, aided by JPY volatility. CNY eases 0.15%, while Asian currencies are down 0.1% on average vs USD. Trading currencies are mixed with MXN, NOK & CHF are down 0.2%, SEK & ZAR eased 0.1%, NZD is flat, and JPY & AUD are up 0.35% vs USD.

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In commodity markets. Oil and Natural Gas prices rallied by 1.3%, Gold and Silver slipped by 0.2%, Copper prices firmed by 0.3%, Wheat prices eased by 0.1%, and Soybean prices gained by 0.4%.

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CAD is sitting at its strongest level since August, pivoting at 75 cents (1.3333) after Canada's inflation rate surprised markets by holding steady at 3.1% vs expectations of a drop to 2.9%. The higher inflation print has likely caused the BoC to take stock, and the prospect of an interest rate cut in Q1 has faded. Derek Holt of Scotiabank said a cut in the coming months "would be a major policy error in the thick of the spring housing market and winter government budget season." The BoC has kept interest rates at 22-year highs; they have left the door open for another hike, saying it was still concerned about inflation while acknowledging an economic slowdown. A break of this 1.3333 level opens the potential for a test of 1.3150, last seen in July 2023.

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EURCAD continues on the back foot with higher commodity prices and the prospect of higher rates for longer from the BoC after yesterday's Canadian solid inflation report.

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EUR holds at the mid-point of its weekly range amid cautious markets. The euro appears to be sidelined, trading independently from its peers as investors respond to continuously hawkish ECB comments, while the USD attempts to rebound amid increasing geopolitical tensions in the Red Sea. The focus will be on ECB chief economist Philip Lane's comments today, with many investors thinking there will not be an ECB interest rate cut before June 2024. Intraday US economic releases and Fed speak will help guide the Euro.

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GBPEUR weakens on softer-than-expected UK inflation data, while the Euro holds static, supported by hawkish ECB rhetoric.

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GBP crashes through 1.2700, giving back Tuesday's gains on softer UK inflation readings. The data showed the UK's annual inflation (CPI) declined to 3.9% in November from 4.6%, while Core CPI dropped to 5.1% in November from 5.7%. Reuters data showed that UK interest rate swaps indicate that markets are pricing in a 50% chance that the BoE could cut interest rates by March 2024 after the softer inflation data. The softer inflation data puts additional pressure on the pound as investors will likely prefer the USD amid the prospect of a narrowing policy divergence between the Fed and BoE. A clean break of 1.2650 could open the way for a rest test 1.2500 vs USD.