RedFX Update: USD weaker – but should it be?
The market is now convinced that the US will be cutting rates by mid-2024 and the USD has fallen on the back of that (markets are now pricing a cut as early as March24). Market expectations are for the UK & Europe to follow suit. The exact timing of the ‘start of the rate cutting cycle’ will determine the fate of the world’s major currencies.
As tensions mount in the Middle East (reports of Houthi rebels seizing 3 vessels and US warships retaliating) and the US explicitly mentioning Iranian involvement, we will see investors buy safe-haven assets such as the USD and gold.
GBP: GBP/USD is higher due the weak USD – trading around 1.2650 (near recent highs).
Levels to watch are: 1.2590 & 1.2715
GBP/EUR has benefitted from a weaker EURO – last week saw some dreadful data from Germany – a country which now looks paralysed but the ‘debt brake’ which will stifle all government expenditure and undoubtedly slow the economy.
GBP/EUR breached 1.1700 briefly on Friday evening and has lost a little ground – now trading at 1.1625 levels.
USA: In mid-October, EUR/USD was at 1.0550, but after the USD pullback it sits around 1.0850 this morning. The Fed’s interest rate hikes have had the desired effect of cooling the economy. However, the market is IGNORING the words of the Fed Chairman:
Federal Reserve Chair Powell tried to push back against market pricing of notable rate cuts next year noting “it would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease.”
He added: “we are prepared to tighten policy further if it becomes appropriate to do so.”
The US Fed is due to meet once more in Dec and keep rates unchanged. All eyes will be on this Friday’s employment data – but markets are outright ignoring the policy-makers!
EUR: Later this afternoon, ECB President Lagarde will give a speech and offer us more insight into the mood and thoughts of European policy makers. A 2% fall in the previous 2 weeks will not have gone unnoticed by the ECB, but that decline will be hard to stop - we know that the ECB is now taking a neutral stance on rates, with good reason - Euro zone inflation was confirmed at 2.9%, down from 4.3% the previous month.
Unless Lagarde suggests otherwise, the EURO decline may continue (especially after poor confidence data this morning). EUR/USD is only high (at 1.0875) due to recent USD weakness, and certainly hasn’t held firm at higher levels.
CAD: Notable moves after employment data was better than expected, and saw USD/CAD fall under 1.3500 for the first time since September.
· Monday: ECB President Lagarde Speech
· Tuesday: AUD Central Bank Interest rate decision & minutes released / EU Producer Prices / US Services ISM
· Wednesday: EU Retail Sales / US ADP employment data / CAD Interest Rate decision
· Thursday: AUD Trade Balance / EU GDP /JPY GDP
· Friday: US Non-Farm employment / US Consumer Confidence / UK Inflation expectations / German consumer price index