US Yields And Fed Rhetoric Set To Dominate Pound Sterling Vs Euro, Dollar

02.10.23: US Yields and Fed Rhetoric Set to Dominate Short-Term Pound and Euro Moves Against the Dollar

It remains the case that markets still need a convincing reason to sell the US currency and the potential trigger is still missing.

A last-minute deal has removed the immediate risk of a US government shutdown and one potential source for a dollar correction weaker.

There has also been no intervention to support the yen by the Bank of Japan which also encouraged markets to push the yen weaker with the Dollar to Yen (USD/JPY) exchange rate nearing the crucial 150.00 level.

There will still be concerns over the risk of intervention in the near term which will create caution.

Developments in US bond yields and Federal Reserve policies will remain a key underlying driver of exchange rates.

After a brief respite, yields have moved higher again with the 10-year yield above 4.60% which has supported the dollar.

In this context, comments from Fed speakers will continue to be watched very closely in the short term.

Investment decisions by global funds will remain important at the start of the fourth quarter.

Pound US Dollar Exchange Rate Outlook

The Pound to dollar (GBP/USD) exchange rate hit highs just above 1.2270 on Friday amid month-end position adjustment and a weaker dollar.

There were, however, sharp losses after the New York open with GBP/USD sliding back to just below 1.2200 as the dollar rebounded.

Domestically, the Pound will gain some support if there is a notable upward revision to the UK PMI manufacturing index, although this looks unlikely.

Markets will be on alert for comments from Bank of England MPC member Mann and whether she moves away from backing a further increase in interest rates.

A sharp decline in long, non-commercial Sterling positions to the lowest level for over 3 months will lessen the risk of further selling and GBP/USD was able to hold just above 1.2200 on Monday.

GBP/USD can consolidate in the near term, but with further selling on any approach to 1.2300.

Euro (EUR) Exchange Rates Today

The Euro to Dollar (EUR/USD) exchange rate posted highs close to 1.0620 on Friday before a retreat to 1.0580.

According to flash data, the headline Euro-Zone inflation rate declined to 4.3% for September from 5.2% previously and below consensus forecasts of 4.5%.

The core rate also declined to 4.5% from 5.3% and below expectations of 4.8%.

The inflation data reinforced expectations that the ECB would not increase interest rates further with increased speculation that there would be a cut in 2024.

The official Chinese PMI data was in line with expectations and recorded a marginal improvement from the previous month.

Although the Caixin manufacturing and services PMI indices held in positive territory, both were weaker than expected.

Unease over the Chinese outlook continued to hamper the Euro with EUR/USD trading around 1.0575 on Monday.

Overall, the Euro will need positive evidence surrounding the regional and Chinese economies or weaker US data to secure more than a limited rebound.

US Dollar (USD) Exchange Rates Outlook

The US core PCE prices index increased 0.1% for August, marginally below consensus forecasts of a 0.2% increase with the year-on-year increase declining to 3.9% from 4.3%. This was in line with market expectations and the lowest reading since October 2021.

The dollar posted further corrective losses after Friday’s European open, but there was a strong rebound later in the session with choppy trading due to month-end position adjustment.

Although the PCE data offered encouragement over inflation trends, Treasuries were unable to hold intra-day highs and lost some ground later in the session.

Higher yields again underpinned the dollar, especially as Wall Street failed to hold gains.

A US government shut down was avoided at the last minute as the House leadership presented a short-term funding bill through November 17th.

This will remove the immediate threat of disruption to data releases.

Pepperstone’s head of research Chris Weston commented; “We also now have a firm understanding that the U.S. Labor Department will release nonfarm payrolls data this Friday, as well as the U.S. CPI report on 12 October, which may have not been the case had the (government) shut down.”

He added; “This puts the 1 November FOMC meeting back on the table as a potential venue for a further 25-basis-point rate hike.”

During the weekend, Bank of Japan Governor Ueda stated that there was still a distance to go to exit the loose monetary policy.

On Monday, there was also Bank of Japan intervention to curb upward pressure on bond yields.

In this environment, the yen lost further ground and the dollar to Yen (USD/JPY) exchange rate posted fresh 11-month highs just above 149.80 before settling around 149.65.

A USD/JPY break above 150 would encourage further dollar buying, but volatility will spike if the Bank of Japan steps in.

The dollar will find strong buying on dips.

Other Currencies

The yen overall lost ground amid low yields and a lack of central bank intervention.

The Pound to Yen (GBP/JPY) exchange rate posted 10-day highs at 183.00 before a correction to 182.25.

The Australian dollar came under pressure on Monday amid reservations over the Chinese outlook.

After hitting 2-month lows just above 1.8850 on Friday, the Pound to Australian dollar (GBP/AUD) exchange rate rallied strongly to 1.9045.

The Pound to New Zealand dollar (GBP/NZD) exchange rate dipped to 4-month lows at 2.0275 before a recovery to 2.0365.

There was a significant correction for the Canadian dollar with the Pound to Canadian dollar (GBP/CAD) exchange rate advancing to 1-week highs at 1.6560.

The Pound to Swedish krona (GBP/SEK0 exchange rate dipped to 2-month lows just below 13.25 before a recovery to 13.32.

The Pound to Norwegian krone (GBP/NOK) exchange rate posted 7-week lows below 13.00 before a recovery to 13.06.

The Day Ahead

The US will release the US ISM manufacturing data. Consensus forecasts are for a marginal improvement in the headline reading to 47.8 from 47.6 previously, although this would still be the 11th successive reading in contraction territory below 50.0.

The prices index will also be watched closely with expectations of a further small decline in prices for the month.

Fed Chair Powell is due to participate in a panel discussion during the day with markets again on alert for any comments on the economy and monetary policy.

There will also be comments due from other Fed speakers. Stronger rhetoric signalling that rates have peaked would undermine the dollar.

During the Asian session on Tuesday, the Reserve Bank of Australia will announce the latest interest rate decision.

Consensus forecasts are for interest rates to be maintained at 4.10%. Forward guidance will inevitably a key element for markets.

Chinese markets will be closed for holidays throughout the week.