09.08.23: Global Equities and Risk Conditions Will Dominate Near-Term Sterling and Euro Moves against the DollarOverall global risk conditions will
09.08.23: Global Equities and Risk Conditions Will Dominate Near-Term Sterling and Euro Moves against the Dollar
Overall global risk conditions will remain very important in the short term. Inflation and monetary policy trends will also remain a key influence for global markets given the impact on risk and investor sentiment.
There will be further reservations surrounding the near-term global outlook, especially with concerns over the Chinese outlook.
Central bank developments will also remain very important for overall market conditions.
There has been a net shift in expectations surrounding the ECB with increased speculation that there will not be a further increase in interest rates at the September policy meeting.
Federal Reserve developments will also be crucial for global markets.
There has been a tentative shift in rhetoric from two members this week with hints that the central bank will not increase rates at the September meeting.
This will increase optimism that US rates have also peaked and help underpin risk appetite.
The latest US consumer prices data, however, could still be an important barrier to hopes of peak US rates.
Stronger than expected data would keep the Fed on high alert over inflation and halt more dovish rhetoric.
Overall liquidity will remain weak in the short term which will increase the threat of choppy trading conditions and out-sized reactions to risk events.
Pound US Dollar Exchange Rate Outlook
Global risk conditions had a significant impact on the Pound during Tuesday with no major UK developments.
The Pound to Dollar (GBP/USD) dipped sharply to lows around 1.2685 as equities moved lower and the dollar posted net gains in currency markets.
GBP/USD did recover the 1.2700 level quickly and recovered further to above 1.2750 on Wednesday to trade around 1.2775 as the dollar pared gains.
Risk appetite attempted to stabilise and expectations of peak interest rates in the US and Euro-Zone also provided an element of Pound support, especially with expectations that the Bank of England will increase interest rates again in September.
Overall confidence in the UK outlook will remain fragile, especially after a downbeat report on the outlook from the NIESR.
The NIESR expects weak growth to persist in 2024 with a 60% chance of recession and it also warned over the stagflation threat to the economy with weak growth and persistent inflation.
Stagflation conditions would certainly not be a recipe for currency strength over the medium term.
In the short term, GBP/USD can creep higher if equities can sustain a more positive tone.
Euro (EUR) Exchange Rates Today
The Euro lost ground after Tuesday’s European open with the focus on the financial sector.
The Italian government confirmed that there would be a windfall tax on the Italian banking sector.
The moved triggered a sharp decline in equities and overall risk appetite also deteriorated which undermined the Euro.
The Euro to Dollar (EUR/USD) exchange rate dipped to lows around 1.0930, but managed to recover some ground as the dollar retreated from highs.
EUR/USD edged higher to 1.0975 on Wednesday as risk appetite attempted to stabilise.
Conditions in the Chinese economy will remain important with net support if there is Chinese stimulus measures. Although state banks intervened to support the yuan on Wednesday there were no major policy announcements
Ray Attrill, head of foreign-exchange strategy at National Australia Bank commented; “There’s still no signs yet from officialdom of imminent support for the Chinese economy, despite the “protest of sorts against the recent run-up in the dollar-yuan rate.”
The Euro may be able to stabilise ahead of the US inflation data, but will need a weaker dollar and Chinese support measures to make significant headway.
US Dollar (USD) Exchange Rates Outlook
In comments on Tuesday, Philadelphia Fed President Harker stated that the latest PCE data showed continued disinflation with the prices index just below 4% by the end of this year. He believes the central bank may be at the point where interest rates can be held steady unless there is alarming new data by mid-September.
This was a net shift towards more dovish rhetoric from Harker and he added that the Fed will probably start to cut rates sometime in 2024.
Bart Wakabayashi at State Street Bank and Trust commented; “We’re starting to get trickles of more dovish commentary from Fed officials, and you start to think, okay, the thinking is really starting to shift.”
He added; “I don’t know if it’s a turning point, but it really throws a wrench into the next meeting.”
Markets have not priced in a September hike, limiting the impact, but growing narrative that rates have peaked would certainly undermine the dollar in global markets.
The dollar posted net gains ahead of Harker’s comments, but fell short of 1-month highs and drifted lower later in the session with a further limited retreat on Wednesday as Chinese state banks stepped in to support the Chinese currency.
The dollar overall is likely to be resilient ahead of Thursday’s US inflation data unless there is a major Chinese policy stimulus announcement.
Other Currencies
Weak risk appetite supported the yen on Tuesday, but Japanese bond yields declined on Wednesday which undermined the yen.
From lows below 141.50, the Pound to Yen (GBP/JPY) exchange rate recovered to 182.70 on Wednesday.
There were further reservations surrounding the global economy and risk appetite remained vulnerable during the day which hurt commodity currencies.
The Pound to Australian dollar (GBP/AUD) exchange rate posted fresh 3-year highs just above 1.9550 before a correction to 1.9470 as equities attempted to rally.
The Pound to New Zealand dollar (GBP/NZD) exchange rate also posted fresh 3-year highs above 2.1050.
The latest New Zealand inflation expectations data was slightly stronger than expected which helped trigger a bounce in the kiwi and GBP/NZD retreated to 2.1000.
The Pound to Canadian dollar (GBP/CAD) exchange rate hit 20-day highs just below 1.7150 before settling around 1.7125.
The Day Ahead
The economic calendar is again very light during Wednesday with no major data releases and no scheduled speeches from Federal Reserve officials.
There will be a significant element of caution ahead of Thursday’s US inflation data.
Overall moves in equity markets will remain an important influence on currency markets.
The latest 10-year bond auction will also be watched closely on Wednesday given the impact on market sentiment.
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