18.08.23: Position Adjustment and Bond Yields to Dominate Near-Term Sterling and Euro Moves against the DollarOverall confidence in the global econo
18.08.23: Position Adjustment and Bond Yields to Dominate Near-Term Sterling and Euro Moves against the Dollar
Overall confidence in the global economic outlook will remain a key element in the short term, especially with further reservations over the Chinese outlook.
In this environment, risk conditions will remain crucial with the nervous underlying tone persisting.
The increase in bond yields will have an important impact in undermining confidence in the very short term.
Higher yields will have a direct impact in undermining risk assets and there will also be significant concerns that higher yields will have a negative impact on consumer spending as mortgage rates move higher.
The global PMI data releases will be watched closely next week and there will be an important focus on monetary policy.
On Monday, China is expected to cut the prime loan rates which will have an impact on risk conditions and may encourage tentative short covering during Friday.
China also defended the yuan with a much stronger than expected fixing.
In this environment, there is scope for nervous consolidation into the weekend with the potential for a tentative recovery in equity markets.
Federal Reserve Chair Powell is due to speak at the Jackson Hole policy symposium on Friday August 25th.
This 3-day event is often used by central bankers to announce policy changes and Powell’s comments will be watched closely.
Given that financial conditions have tightened, Powell may nudge the rhetoric in a slightly less hawkish direction.
There will also be the potential for comments from ECB and bank of Japan officials, although the full schedule has not been released.
Pound US Dollar Exchange Rate Outlook
The Pound overall continued to hold a firm tone on Thursday with net gains on many crosses.
There was upward pressure on UK yields with the 2-year yield at 6-week highs above 5.25%.
Higher yields underpinned the Pound, although there will also be concerns over that mortgage rates will increase further which will tend to undermine the economy.
Overall risk conditions were also very fragile during the day. The FTSE 100 index posted fresh 1-month lows on Thursday which hampered the Pound to some extent.
GBP/USD was able to consolidate below the 1.2750 level on Thursday.
The latest retail sales data recorded a 1.2% decline for July compared with expectations of a 0.6% decline and the data will trigger some reservations over consumer spending trends, although there will have been a negative impact from weather conditions.
GBP/USD retreated to the 1.2710 area after the data
Global risk conditions will remain an important element during Friday with the Pound needing an improvement in conditions to secure significant support.
Overall, GBP/USD has scope for only a limited recovery at this stage.
Euro (EUR) Exchange Rates Today
There were no major Euro-Zone developments on Thursday with risk conditions and Chinese developments continuing to dominate markets.
The Euro to Dollar (EUR/USD) exchange rate dipped to fresh 6-week lows around 1.0860 before a marginal recovery to 1.0880.
There will be further important reservations surrounding the Euro-Zone economy, especially with fears over the Chinese outlook which will have an important impact on Euro-Zone exports and overall risk conditions.
The ECB has been very quiet during this week amid the peak holiday season, but chief economist Lane is due to speak on Friday and any remarks on inflation will be watched closely.
Markets will be on alert for any guidance on the September policy decision.
Overall, EUR/USD has scope for only a very limited recovery at this stage.
US Dollar (USD) Exchange Rates Outlook
US initial jobless claims declined to 239,000 in the latest week from a revised 250,000 the previous week and close to consensus forecasts of 240,000, although continuing claims increased significantly to 1.72mn from 1.68mn.
The Philadelphia Fed manufacturing survey rebounded to a 15-month high of 12.0 for August from –13.5 previously and well above market expectations of 10.0. There was also a rebound into positive territory for new orders and shipments for the month.
Inflation pressures were mixed with a significant increase in prices paid, but an easing of the prices received component.
Companies were notably less confident in the outlook while inflation pressure are expected to intensify.
The overall data impact was mixed, although the key element was that US yields moved higher again.
Higher bond yields and vulnerable risk conditions continued to provide net dollar support.
The currency index posted 2-month highs, before a significant correction on Friday as the yen corrected.
China’s move to defend the yuan also limited scope for further dollar gains.
IG analyst Tony Sycamore commented; “The market wants the Fed to go on hold, but the data just isn’t supporting that. The risk aversion, the higher yields, the resilient economic data; all of those things have played out to perfection for the U.S. dollar.”
There will be scope for only a limited dollar correction at this stage.
Other Currencies
Overall risk conditions continued to have an important impact on all asset classes including currencies.
The Australian dollar remained under pressure, although the Pound to Australian dollar (GBP/AUD) exchange rate posted edged lower from 40-month highs just above 1.9970.
The Pound to New Zealand dollar (GBP/NZD) exchange rate also traded at 2.1520 and close to 40-month highs of 2.1530.
The Pound to Canadian dollar (GBP/CAD) exchange rate hit 1-month highs at 1.7270.
The yen initially remained under pressure on yield grounds before regaining some ground as equities moved lower.
The Pound to Yen (GBP/JPY) exchange rate posted 7-year highs around 186.45 before a correction to 1.8520.
The Norwegian Norges Bank increased interest rates by 25 basis points to 4.00%, in line with consensus forecasts and the bank is expecting rates again at the September meeting.
The Pound to Norwegian krone (GBP/NOK) exchange rate edged lower to just below 13.50 after the policy decision.
The Day Ahead
There are no significant US data releases on Friday and position adjustment will remain a key element into the weekend.
Overall risk conditions, bond yields and Chinese developments are likely to dominate markets and currency moves.
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