RedFX Update: September starts with a bang
Last week’s Jackson Hole Symposium saw the US Central Bank change its policy-stance to one that has an inflation ‘target range’. Why is this important? The US will allow inflation to over and under shoot its target, which theoretically allows the Central Bank to keep rates lower / higher for longer when adjusting policy to keep the economy on target. In the short-term, by allowing lower rates for a longer period, the USD will remain under pressure. On the other hand, this dovish message is stock-market friendly, and the Dow Jones has now recovered 56.4% since the March sell-off.
If you have USD holdings, Wednesday afternoons data, followed by Fridays Employment data are the key things to keep your eyes on. The data from the US has seen a decent rebound in employment, and Manufacturing PMI data points to a V-Shaped recovery for that sector. We need some more solid data to back this up, and the market will react accordingly.
As the USD strength fades, GBP/USD hit 8mth highs above 1.3300, and EUR/USD looks set to push through 1.2000.
EUR: Data this week sees German employment on Tuesday, followed by EUR Inflation data the same morning. The Eurozone is a little light on data this week, but all eyes will be on travel restrictions, rate of infection and the handling of the region’s schools returning successfully.
Questions are being raised over the optimism tied to the Eurozone recovery, which has prompted a surge in the Euro and by extension this had seen the Pound piggyback the move against the USD. However, with ECB minutes suggesting not to get married to the “EU”phoria narrative with August PMI data disappointing.
Brexit / GBP: GBP has performed well over the past week, although it is only versus the USD that it has broken out of recent ranges. Weekend headlines show growing dissent from Conservative back-benchers to the Chancellor’s tax hike recommendations in the November budget. The government is looking to raise £20bio through extra taxes to help bolster the UK coffers in the post-Covid environment. Reports were that pension tax relief could be cut, capital gains tax increased and corporation tax adjusted from 19% to 24%.
The next few weeks look decisive for Brexit, as parliament returns and Brexit headlines start to be the focus for markets once again. As one market commentator says:
“UK-EU trade talks gives a sense of Déjà vu of the 2019 Brexit saga. Once again the UK and EU are heading for an Autumn showdown to reach a trade agreement. The EU Chief Negotiator, Barnier, stated that at this stage an agreement seems unlikely. However, in the world of politics, 2-months is a lifetime, as such, while the clock is indeed ticking, there is still plenty of time to break the impasse before the unofficial deadline at the end of October. Baseline case remains for an agreement to be reached.”
AUD: The Australian Central Bank meets this week, and AUD has pushed higher over the last few weeks – on 1st Sep, the Central Bank Governor stated “a recovery was under way in most of Australia”. A continued ‘wait and see’ approach with an optimistic tone will likely see AUD push through the 2019 high of 0.7295 AUD/USD.
Japan: Prime Minister Abe announced his retirement for health reasons, and after 8yrs of Abenomics, we are likely to see the Finance Minister take of the Prime Ministerial role. Although wholesale changes are unlikely, markets are rattled, and the Nikkei and JPY have weakened. EUR/JPY though 125.00 is a key move.