Rate hikes begin, GBP rebounds and USD is on a roll
RedFX currency update – plenty to digest in terms of data and inflation – something that the global economy hasn’t seen for 2 decades.
GBP Volatility: As we noted in our updates last week, the quarter-end & month-end re-balancing in FX markets put GBP under enormous strain. Added to market forces, there were domestic supply-chain issues in the UK, and inflationary forces are causing real-world troubles. The result was GBP/USD fell to the lowest level since January21 (1.3425) and GBP/EUR followed suit, falling to 1.1550 – the lowest level since April 21.
GBP/USD has not recovered and remains around 1.3600 because of USD strength. As inflationary pressures take hold in the US, and tapering appears to be around the corner (most economists expect tapering to be announced in November), the USD is strengthening. 10yr US Yields above 1.5% will continue to boost the USD (currently at 1.57%, the highest since June21). Commerzbank economists have a target of 1.3160 based on technical factors, and view the recovery as very short-term.
GBP/EUR has recovered all of last week’s lost ground, and sits above 1.1700 once again, but Credit Suisse see continued volatility:
“On the GBP-positive side, there are ongoing signs of UK labour market shortages and corresponding upward wage pressure. On the other hand, these highly publicized shortages have reminded markets that the UK could pay a growth price for high input costs and supply-chain difficulties. The net result of these contrary forces could be many months of push and pull, lots of ‘gamma’ but with the EUR/GBP cross ultimately not moving especially far from where we are now.”
EUR/USD sits around 1.1600 – the lowest level since June 2020, marking a strong USD and a very worrying outlook for the €€ as the market fears how well positioned the Eurozone is to cope with inflationary pressures and continued supply-chain issues.
Norway and New Zealand have started raising interest rates. New Zealand raised (as expected) from 0.25% to 0.5%, and alongside Norway, mark the first wealthy nations to react to inflationary pressures and reverse the accommodative measures put in place during the Covid crisis. However, the Kiwi didn’t rally due to a slightly negative economic outlook in the statement.
This could usher in a new rate-hiking cycle across the globe – an economic environment not experienced for a long time, and bound to cause shocks along the way.
The week ahead:
Wednesday: USA jobs report (2nd tier) / UK PM’s speech outlining plans for domestic UK policy
Thursday: Canada Central Bank Speech
Friday: USA Non-Farm employment report – the most closely watched statistic