Global News
What a couple of weeks for GBP! Domestic politics does not always affect currency markets, but fiscal ill-discipline and lack of accountability does. This is what caused GBP/EUR to swing from 1.1400 in late Sep to a low of 1.0899 and then recover to 1.1400 today. Along the way, the daily volatility has been immense. GBP/USD followed suit with a swing from 1.1260 exactly one month ago, down to 1.0500 on 26th Sep, and rebound to 1.1300 today.
RedFX does not scare-monger. We have not sent messages to clients with an air of panic – we have remained close to clients throughout the recent GBP volatility, but not suggested a panicky strategy. The clients that have benefitted the most have taken a measured view and set targets using Forwards and Market Orders.
Currently Rishi Sunak is the odds-on favourite to be the next PM, likely to bring much-needed, immediate fiscal discipline to the UK.
The year has been punctuated by USD strength, which has waned since September. Despite this, EUR/USD has dropped from 1.1500 in Oct21 to 0.9800 today. The USD story is not over, it is only just beginning. Business news is full of ‘the Fed pivot’ which will see the US Fed take its foot of the accelerator pedal of interest rate hikes.
The strength of the USD is a problem for the US but is one of many ‘headwinds’ facing the economy. We suspect that we will hear less Fed rhetoric about big rises in interest rates as they start to prepare the global economy for a slowdown – slowing the rate of increase in an orderly manner is not easy(!) SocGen economists have it nailed:
“We’re closer to peak US yields and peak dollar, but if you want to know how to time the turn with confidence, you need to understand market psychology. All I know is that the last stage of the dollar market will see more big moves than direction.”
The EURO is under continued pressure, with CNBC reporting “Fears of a severe recession deepen as European business activity slows on surging energy costs”. Business activity reported this morning saw the steepest European loos since April 2013 (excluding Covid-related data) – the reading of 47.1, down from 48.1 last month takes us deeper into contraction territory.
The ECB is set to raise interest rates this week following clear guidance in recent months. Bank UOB say:
“For now, we see the ECB hiking by another cumulative 50bps for this year to bring the refinancing rate to 1.75% and the deposit rate to 1.25% by year-end. This will bring rates to the “neutral” territory of between 1% to 2%.”
China has been in the headlines recently: China published the Q3 GDP after a rare delay last Tuesday and the 20th Party Congress ended over the weekend. The USD/CNY remains firm after the data. Economists at Commerzbank expect the yuan to continue weakening in the coming months. China's Q3 GDP better than expected but outlook remains sluggish – Commerzbank says:
“China’s economy expanded 3.9% YoY in Q3, up from a meagre 0.4% in Q2. In seasonally adjusted Quarter on Quarter terms, GDP also grew by 3.9%. But the apparently strong QoQ growth is not something to cheer for, as it was in large part due to the low base in Q2 when the economy contracted 2.7% q/q because of Shanghai’s lockdown.”
Given the ‘challenging global back-drop’ to exports, the Chinese economy will continue to be under pressure. Due to the size and influence of China, a slowing economy will have a knock-on effect across the region – if this happens and the ‘Fed pivot’ is not managed, there could be a repeat of the taper tantrum experienced in 2013 which impacted severely SE Asian economies and spilled over to global markets.
