Global Business Confidence Data in Focus, Inflation Pressures Crucial for Exchange Rate Trends The larger than exp
Global Business Confidence Data in Focus, Inflation Pressures Crucial for Exchange Rate Trends
The larger than expected ECB rate hike reinforced expectations that global central banks want to move more quickly to tighten monetary policy in an attempt to head-off the threat of a sustained increase in inflation.
The faster rate of interest rate increases will tend to undermine global risk appetite in the short term with notable concerns over the risk of recession, but there will also be some optimism that more rapid tightening will allow a lower peak in rates.
Overall trends in risk appetite will continue to have an important impact on exchange rates with optimism and pessimism continuing to battle for dominance.
In this environment, any evidence of peak inflation pressure in the business confidence data would provide an element of support for risk-sensitive currencies.
Pound US Dollar Exchange Rate Outlook
The Pound to Dollar (GBP/USD) exchange rate was again unable to sustain rallies on Thursday and briefly dipped below 1.1900 before a net recovery to just above 1.1950.
There were fresh reservations over the UK fundamentals, especially with a sharp increase in debt-servicing costs to a record high triggering a fresh focus on fiscal policy.
In this context, there was further unease over pledges of tax cuts by Conservative Leadership candidate Truss.
Overall, confidence in the UK outlook will remain brittle
Trends in risk appetite will also be important with GBP/USD needing stronger than expected business confidence data and positive trends in global equities to make headway and sustain a move above 1.20.
Euro (EUR) Exchange Rates Today
The Euro spiked higher after the ECB policy decision with the central bank increasing interest rates by 50 basis points to 0.50% while the deposit rate increased to 0.0% and moved out of negative territory for the first time since 2014.
The Euro to Dollar (EUR/USD) exchange rate posted highs above 1.0270 before a retreat back below 1.0200.
Italian Prime Minister Draghi resigned and fresh elections are likely to be held in September which hurt the Euro.
Political uncertainty will continue to hamper the single currency and there will be further notable reservations over Russian gas supplies to Germany.
Although some supplies have resumed through the Nord-Stream pipeline, there are major reservations over the outlook this winter.
Commerzbank focusses on the gas concerns. It notes that Russian President Putin has announced a further reduction in the supply volume for next week and added; “a complete supply freeze cannot be ruled out.”
According to Commerzbank; “This means that a significantly higher euro risk premium remains justified. This is because the threat of a gas shortage puts a double burden on the single currency. Even if rationing could be avoided, the economy faces a significant structural change away from cheap Russian gas, which will weigh on potential growth and return prospects in the euro area. At the same time, high gas prices are fuelling inflation and reducing the purchasing power of the euro.”
US Dollar (USD) Exchange Rates Outlook
The latest US data triggered fresh reservations over the manufacturing sector with a sharp dip in the Philadelphia Fed manufacturing index. There was a dip in inflation pressure and optimism over the outlook dipped to the lowest level since 1979.
The US currency was still protected by a lack of confidence in the global economy and US currency moves were dominated by trends in risk appetite.
The dollar to yen (USD/JPY) exchange rate dipped to lows at 137.00 before a recovery to 137.90 as the dollar index secured a tentative net gain after testing 2-week lows.
The dollar will tend to strengthen if global recession fears intensify. In this context, there will be a mixed impact from US PMI data. Paradoxically, the dollar could gain net support if the data s weaker than expected.
Other Currencies
The Swiss franc maintained a strong tone during Thursday with an underlying reluctance to sell the Swiss currency.
The Pound to Franc (GBP/CHF) exchange rate dipped to lows near 1.1550 and close to 2-year lows before a limited recovery to 1.1580.
Sterling overall struggled to generate any significant support against major currencies. The Pound to Australian dollar (GBP/AUD) exchange rate retreated to 6-week lows at 1.7280 before a recovery to 1.7330.
The Pound to New Zealand dollar (GBP/NZD) exchange rate recovered from lows at 1.9160 to trade around 1.9230.
The Week Ahead
The latest PMI business confidence data was an important focus during Friday. The flash data from the Euro-Zone, UK and US was released during the day with evidence on the manufacturing and services sectors.
Markets will be assessing the overall global outlook and the relative performance between major economies.
Traders will also be on alert for any further comments from ECB officials.
Overall trends in risk appetite will continue to be watched closely during the day and there will be position adjustment ahead of next week’s Fed policy meeting.
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