RedFX Update: GBP pulls back as USD gives up some gains
GBP: After last week’s 7% drop in GBP vs USD, sterling has managed to find support again, which came in the form of a policy U-Turn by the new UK Chancellor and the government admitting having mis-handled the announcements and mis-read the potential impact of its actions.
GBP/USD 1.1425 to 1.0650 and back to 1.1350 in 7 days was justified by financial markets as a reaction to a set of policy announcements that showed 0 understanding of financial markets.
GBP/EUR went from 1.1550 to 1.0900 and back to 1.1450 in the same period – more than anything, these events have shown the vulnerability of GBP.
Markets have not lost sight of the fact that the UK market is now priced to reflect over 3% of rate hikes in the next 3 scheduled meetings and this is reflected to be frontloaded with 1.5% priced for November – this seems to be underpinning the GBP rebound.
Dates for the diary (UK):
Whenever the UK OBR review is published (being brought forward by the Chancellor)
21st October – S&P Ratings Agency UK review (likely to downgrade the UK’s ratings, affecting borrowing costs for investors and the government).
In other news
EURO: Last week’s weak German data was another European statistic which disappointed. Monday’s 2nd tier manufacturing data releases also disappointed – pushing the manufacturing sector further into contraction. The single currency will struggle to rally in the face of ongoing pressures in the real economy. The ECB is committed to hiking rates to combat inflation, which is giving the EURO some support – without this underlying support, the EURO would be under real pressure.
One headline that received little attention but is likely to receive more if implemented is the headline of: “ ..EU economy and single market commissioners call for joint borrowing to deal with energy crisis …” This should support the single currency if it comes to fruition – worth keeping eyes & ears open!
EUR/USD has been under 1-1 for 1 month, hitting a low of 0.9550, currently trading around 0.9900 after some recent USD weakening.
USD: This Friday is the key monthly ‘Non-Farm’ employment data. After adding 315,000 jobs last month, economists expect 250,000 new jobs and the unemployment rate to remain at the extraordinarily low level of 3.7%. We can expect the FX market to react to this.
What comes next
Next week (Weds 12th Oct) is US Fed release the minutes of the previous interest rate meeting – always closely watched.
Earlier this week, the US PMI data showed a decline, but remained in expansionary territory – unlike the Eurozone data mentioned above - example of fundamental divergence that has allowed the USA to maintain a hawkish outlook relative to the Eurozone.
