08.08.23: Summer Trading in Full Swing, Chinese Data to Drive Near-Term Sterling and Euro Moves against the Dollar
Liquidity will remain weak in the short term on seasonal grounds with the peak holiday season in the US and Europe undermining trading volumes.
This lack of liquidity will tend to increase the impact of any notable fundamental developments, especially with the threat of substantial stop-loss selling and position adjustment.
There will also be concerns that very high US debt issuance will drain liquidity from US and global markets, increasing the threat of volatile trading conditions.
From a medium-term perspective, the global economy and central bank interest rate developments will be crucial.
The latest Chinese trade data was weaker than expected with annual declines in imports and exports.
The data will reinforce doubts surrounding the Chinese and global outlooks, but will also increase pressure for further stimulus from Beijing.
Commonwealth Bank of Australia strategist Carol Kong commented; “I think markets have grown increasingly insensitive to disappointing Chinese economic figures, we’ve got to a point where weak data will just reinforce calls for further policy support.”
The latest US inflation data on Thursday will be extremely important for global sentiment. Before then, Chinese inflation data in Asia on Wednesday will also be important for expectations surrounding the Chinese economy and expectations surrounding Chinese stimulus measures.
For consumer prices, consensus forecasts are for are for an annual rate of –0.5% for July from 0.0% previously with an annual decline of 4.0% for producer prices.
Weaker than expected data would reinforce pressure for further policy stimulus.
There will also be hopes that disinflation will continue in the US and Europe, potentially allowing key central banks to stop raising interest rates.
An end to the cycle of raising interest rates would provide an important boost to risk appetite.
The clash of these forces will tend to drive global asset prices and potentially lead to frequent shifts in market sentiment.
According to Goldman Sachs; “it is important to reiterate that we expect this uncomfortable balance to persist, and weaker inflation readings to ultimately allow the Dollar to weaken. But, this is what a shallow and bumpy path feels like, and we expect more of it to come.”
Pound US Dollar Exchange Rate Outlook
According to Bank of England chief economist Pill, there are risks on both sides for UK inflation. There is a risk that inflation will fall below target, but also risks that the central bank has not raised interest rates enough.
The comments overall provided an element of support to the Pound, although global trends dominated.
There was further speculation that the Federal Reserve and ECB would not increase interest rates again which provided an element of Pound support.
There were still reservations surrounding the UK outlook and risk conditions overall were still fragile.
The Pound to Dollar (GBP/USD) exchange rate was held below the 1.2800 level to trade around 1.2760 on Tuesday.
The British Retail Consortium (BRC) data recorded an annual increase in like-for-like retail sales of 1.8% for July from 4.2% previously and compared with expectations of 3.0%.
Bad weather had an impact on the month but there will be further reservations surrounding consumer spending trends, especially with tighter credit conditions.
Global risk conditions will continue to have an important impact on the Pound.
Overall, there is scope for GBP/USD to creep higher, but it will be difficult to make much headway given headwinds from reservations over the UK outlook.
Euro (EUR) Exchange Rates Today
The Euro overall was held in relatively tight ranges on Monday.
The Euro to Dollar (EUR/US) exchange rate initially retreated to 1.0965 before a recovery to test the 1.1000 area and traded fractionally above this level on Tuesday.
The latest Euro-Zone investor confidence index was stronger than expected which helped underpin the currency.
The Euro will, however, be hampered by the latest Chinese trade data which will trigger fresh reservations surrounding Euro-Zone exports.
The Euro will, however, gain protection if China pledges further stimulus and EUR/USD should be resilient in the short term.
US Dollar (USD) Exchange Rates Outlook
There were no major data releases on Monday.
There were some comments from New York Fed President Williams during the day.
Williams stated that the actions to bring inflation down were working and that core inflation could decline to 2.5% by the end of this year. He added that it was possible that interest rates would decline during 2024.
The comments were marginally more dovish than recent comments and the dollar initially edged lower.
The US currency, however, gained fresh support in Asia after the Chinese trade data.
Comments from Fed officials will continue to be watched closely in the near term, although the latest consumer prices data on Thursday will be the key release this week.
The dollar should be able to resist significant selling ahead of the inflation data.
Other Currencies
The latest Japanese data on wages was weaker than expected with the annual increase held to 2.3% from 2.9% previously.
The earnings data maintained expectations that the Bank of Japan would maintain a very dovish monetary policy which undermined the yen.
From lows below 181.00 on Monday, the Pound to Yen (GBP/JPY) exchange rate posted a strong advance to highs just below the 183.00 level before a retreat to 182.50.
Weak Chinese trade data was an important element in undermining the Australian currency with domestic consumer confidence also weak.
The Pound to Australian dollar (GBP/AUD) exchange rate posted a strong advance to fresh 3-year highs just above the 1.9500 level.
The Pound to New Zealand dollar (GBP/NZD) exchange rate also posted fresh 3-year highs just above 2.1000.
The Pound to Canadian dollar (GBP/CAD) exchange rate also advanced to 10-day highs just below 1.7100.
The Day Ahead
The economic calendar is again relatively light during Tuesday.
Markets will continue to monitor rhetoric from Federal Reserve officials during the day.
The Chinese inflation data will be released on Wednesday which will have an impact on expectations surrounding Chinese economic stimulus measures as well as risk conditions.
Overall moves in equity markets will remain an important influence on currency markets.
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