Overnight Wrap 10 Jan 2024 / EURUSD Trade Update

U.S S&P closed near the 2023 highs and the USD index moved sideways, down 0.16% on the day. SEC gave an approval for BITCOIN ETF. 

 Overnight, NY FED President John Williams in his "Rule of Three" Speech, while discussing the outlook for 2024 mentioned that he sees GDP growth for 2024 to slow to 1.00% - 1.25% (Fed Proj. 1.40%), U/R to rise to around 4% (Fed Proj 4.10%) and PCE inflation to decline to slow towards 2.25% (Fed Proj 2.40%). On the stance of monetary policy, he maintained that policy is restrictive and will need to be restrictive to achieve 2% inflation goals on sustained basis and the Fed will look at the totality of incoming data, evolving outlook and balance of risks to inform the future path. 

On the subject of balance sheet run off, Fed has reduced the securities holding by about $1.3 trn and the decline in securities holding has mostly been absorbed by a drop in ON RRP and aggregate reserve balances are little changed since 2022. "Looking ahead to this year, as the balance sheet continues to shrink and usage of the ON RRP continues to decline, we will closely monitor money market conditions and the demand for reserves.

The Implied market Fed Fund Pricing for 2024 was almost unchanged pricing in 139 bps of rate cuts. 

Yields	High	Low	Close	DoD ▲
US 2Y	4.38	4.33	4.36	-0.40
US10Y	4.04	3.98	4.03	1.50
US2s10s	-0.33	-0.35	-0.33	1.90
US30Y	4.22	4.15	4.21	2.00
JGB 10Y	0.61	0.58	0.59	-
DE10Y	2.20	2.14	2.19	4.30

We continue to hold on to 50% of the EURUSD position (Read 1, Read 2) initiated on Jan 5, 2024. 

German Yields rose 4.30 bps on the day and the DE10sUS10s spread narrowed to 1.80%. The spread has been consolidating in an ascending right angle triangle and a break out above the 1.78% could mean more gains accrue to Eur. 

ECB speak alongside an unemployment number better than consensus estimates has pared back pricing for rate cuts this year with current pricing seen at 2.54%. ECB's Schnabel said it is too early to discuss rate cuts and they will keep key policy rates at restrictive levels until they are confident that inflation sustainably returns to the 2% target. ECB's de Guindos said future decisions will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction, while he added that the rapid pace of disinflation observed in 2023 is likely to slow down in 2024. ECB's de Cos said future ECB moves will depend on data but uncertainty is high and risks to economic growth are still skewed to the downside. De Cos added that the Euro area economy probably stagnated in Q4 and said the ECB must avoid insufficient and excessive tightening. (zerohedge)

For the day ahead, we are looking at the Economic Bulletin from the EZ and the Tier 1 data release out of the U.S will be the CPI / Core CPI and Jobless Claims numbers.