RedFX Update: GBP slumps as USD rides high (MAJOR NEWS)
USD news: Employment better than expected +15 000
Volatility has returned to FX markets with a vengeance over the past 2 weeks as investors flocked to buy the USD & negativity continued to surround GBP. The USD was given yet another boost last week as the Fed Chairman vowed to keep raising interest rates to combat inflation – his words were echoed by 2 other Fed members this week.
Today’s employment data showed a rise in payrolls of 315,000 which was slightly better than expected (300,000) and had a limited impact upon the USD, which is resting at high levels. More worryingly, the US jobless rate rose from 3.5% to 3.7% which capped any USD gains.
GBP news : With a 22% INFLATION prediction, the UK’s economy shrinks
During August, GBP/USD slumped 5% from 1.2200 to 1.1550. At the same time, GBP/EUR fell from 1.2000 to 1.1600. Weak manufacturing data this week seemed to be final straw, after figures showed that the UK economy shrank in April and June, along with Goldman Sachs predicting inflation at 22% in Q4 2023. The UK bond market suffered its worst slump since 1994 as yields rocketed.
The UK stock market has not experienced the large falls experienced by other markets because of its make-up … the majority of FTSE100 corporates having non-GBP earnings and it has a heavy weighting on the energy sector. The FTSE is only 9% away from its all-time high.
Sep 5th sees the result of the Conservative Party Leadership race. Although domestic issues rarely have an impact on FX, if Liz Truss is victorious, Danske Bank note: “we expect substantial fiscal easing if Truss wins. This could add further upside pressure on inflation and yields.” Also, the NIP Bill is passing through government at the moment – if this goes ‘badly’ the EU is able to terminate the Free Trade Agreement, sparking a trade war, which will certainly put more pressure on UK business activity.
EUR news: EURO doesn’t budge , not even a inch as EUR/USD reaches equilibrium level
EUR/USD remains around parity (1 for 1), but due to USD strength, it has traded as low as 0.9900. This means that the EURO has lost around 20% of its value since December 2021. Anecdotal evidence shows that US tourism to Europe is much higher, and US buyers of European vacation homes is also higher. As well as today’s employment data which hit expectations, the US released data on Thursday showing very strong growth in employment in the manufacturing sector, suggesting the US economy is ‘holding in there’ from an employment perspective.
The EURO itself has been strengthened by ECB speakers becoming more ‘hawkish’ (supporting interest rate hikes) to fight inflation in the Eurozone. This strength fuelled the GBP/EUR fall through the week.
Eurozone consumer EXPECTATIONS of inflation over the next 12months remain unchanged at 5% - this is an important data-point for the ECB as expectations are something the central bank has to manage. Expectations for employment and economic growth were lower, which reflects negative sentiment across the region.
Elsewhere:
AUD: It hasn’t been a good year for AUD, with its own domestic problems, and it always feels the pinch when China slows down. However MUFG suggests that employment data is picking up, and with the Central Bank taking supportive action, it predicts a robust start & a rebound into 2023.
JPY: As Japan continues with ultra-loose monetary policies, and the exact opposite is happening globally, the JPY is significantly under-performing. USD/JPY broke higher, through the all-important 140.00 level this week.
Next week:
Monday: EUR Retail Sales
Tues: AUD Interest rate decision / USD Services activity data
Weds: AUD GDP data / EUR GDP / UK Monetary Policy Hearing / CAD Interest rate decision
Thurs: ECB Interest Rate decision & Press Conference
Fri: China Inflation data / CAD employment data
The RedFX Team