07.09.23: Pound Under Pressure, Bank of England Expectations Crucial for Near-Term Moves against the Euro and Dollar
The latest US data did not trigger a significant shift in expectations surrounding the forthcoming Federal Reserve policy decisions, but it did increase concerns that the Fed would have to maintain higher interest rates for longer.
The Beige Book suggested that consumer spending is coming under some pressure due to dwindling savings levels while borrowing has increased.
Given this combination, there will be increased concerns that the US economy will have to come under notable pressure in order to bring inflation under control.
A key element in global currency markets is still that funds are struggling to find attractive alternatives to the dollar.
Overall confidence in the global economy remains weak with further concerns over the Euro-Zone and Chinese outlook.
These concerns act as a direct impediment to selling the dollar against the Euro and yuan.
There are also expectations that other global central banks are close to peak interest rates.
In this context, markets will remain on alert for guidance from all central bank, especially the ECB and Bank of England.
Risk conditions are also vulnerable which will continue to provide defensive support for the US currency.
The dollar is, however, still seen as overvalued with scope for a sharp decline if there is a shift in narrative surrounding the US outlook, especially if there is a sudden crack in consumer spending.
If the US economy deteriorates, the dollar will lose support on yield grounds, but this would be offset by potential safe-haven demand.
Pound US Dollar Exchange Rate Outlook
The Pound came under significant pressure during Wednesday.
Overall risk appetite remained vulnerable during the day which undermined Pound support and there were also significant domestic developments.
In testimony to the Treasury Select Committee Bank of England Governor Bailey stated that he thought the central was now much nearer the top of the interest rate cycle.
He reiterated that he expects inflation to fall further, but it was not clear how much that would slow wages growth.
Although he expressed some caution over wages, the rhetoric was considered a significant coded message that rates are likely to peak in September.
In response, there was a slide in the Pound.
With a firm US dollar, the Pound to Dollar (GBP/USD) exchange rate dipped to 12-week lows near 1.2480 and traded below the 1.2500 level on Thursday with another test of 1.2480.
There will be scope for a further erosion in peak UK rate expectations which will tend to undermine the Pound.
Risk conditions will also be an important element during the day with Sterling vulnerable if equities retreat further.
Although there will be relief at times, GBP/USD overall is liable to drift lower on a dip in rate expectations.
Funds will be looking to target May lows near 1.2310.
Euro (EUR) Exchange Rates Today
The latest Euro-Zone data continued to generate concern with a slide in German factory orders and overall confidence in the outlook remained weak.
The Euro to Dollar (EUR/USD) exchange rate posted fresh 12-week lows just above 1.0700.
The Euro, however, was able to show some resilience despite vulnerable risk conditions and traded near 1.0720 on Thursday.
Markets will remain on alert for any unofficial comments from ECB sources even though the bank should be in a silent period ahead of next week’s policy decision.
According to MUFG, some caution is needed surrounding the ECB decision. It noted; “The OIS market only has 6bps of tightening priced for next week which seems low to us. A surprise hike would also help to reverse some of this US dollar strength as well.”
US Dollar (USD) Exchange Rates Outlook
The US ISM non-manufacturing index strengthened to 54.5 for August from 52.7 previously.
This was above consensus forecasts of 52.5 and a 6-month high.
New orders and employment also increased at a significantly stronger rate on the month while prices increased at the fastest rate for 4 months.
The Fed’s Beige Book indicated that consumer spending is under some pressure with pent-up savings eroded and inflation is easing, especially in the goods sector.
Futures markets still indicated close to a 50% chance that interest rates have peaked.
Although there was no significant change in Fed pricing, the ISM data triggered further fears that the central bank would have to keep interest rates higher for longer.
Overall confidence in the global economy also remains weak which supported the US dollar.
The dollar index overall posted a fresh 25-week high.
Markets will monitor comments from Federal Reserve officials closely with a raft of speakers due during the day.
There will be a big reaction if speakers hint strongly that a September hike is needed.
Given the risk of Japanese intervention, the possibility of a surprise ECB policy decision and overvalued currency, there is likely to be caution over further dollar buying, but the currency is likely to be find very solid support on dips at this stage.
Other Currencies
The Bank of Canada held interest rates at 5.00% following the latest council meeting which was in line with consensus forecasts.
The bank noted weaker growth and a less tight labour market, but also warned that it was still concerned over inflation pressures in the economy.
The relatively hawkish statement helped protect the Canadian currency.
The Pound to Canadian dollar (GBP/CAD) exchange rate dipped to 3-week lows at 1.7040 before a marginal correction.
Commodity currencies overall remained under pressure amid a lack of confidence in the global economy which cushioned the Pound on the crosses.
The Pound to Australian dollar (GBP/AUD) exchange rate retreated to 1.9580 before a recovery to 1.9620.
The Pound to New Zealand dollar (GBP/NZD) exchange rate settled around 2.1275 from 2.1250 lows
Underlying yen vulnerability also helped curb losses in the Pound to Yen (GBP/JPY) exchange rate as it consolidated around 184.50 from 184.25 lows.
The Day Ahead
The latest US jobless claims data will be released on Thursday with consensus forecasts for an increase to 232,000 from 228,000 the previous week.
Trends in US bonds and equity markets will be very important for overall market direction during Wednesday.
Chinese developments will remain a key influence on risk conditions and asset prices.
Rhetoric from Japanese officials will also be watched very closely given the possibility of intervention if the yen slides.
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