RedFX Update: Volatility expected as rate paths diverge
In July, the US, UK and the ECB increased rates – but now the picture is not as clear. As the future path of rates diverges across the globe, currencies will become volatile and some of the moves may not be undone in this economic cycle. This shows the complexity that central banks are facing when making policy decisions – all of which will feed into the currency markets.
GBP: Through August GBP/USD has pulled back from a 1.3100 high to 1.2700 as the USD strengthened a little and fears remain about the medium-term outlook for the UK economy. These fears are supported by some poor UK data prints - but it is very likely the Bank of England will keep raising rates in Sep from 5.25% to 5.5%.
Last week Huw Pill - the Bank of England’s Chief Economist reiterated that rates in the UK “will not fall any time soon” which keeps GBP high. GBP/EUR has bobbled along in August around 1.1650 and continues to struggle to break 1.1720.
Thursday’s Treasury Committee hearing specifically looks at the UK expenditure, administration and policies of the UK Treasury – it could shed more light on the short and medium-term policy direction.
USA: Mohamed El-Erian's take on the US employment data from Friday is below. A great summary of why we could see USD weakness in the medium term:
Taken at face value, the US August jobs report increases the probability that the highly data-dependent Fed will not hike again as:
-Job gains (including revisions) moderated (187,000 and -110,000);
-The unemployment rate went up to 3.8%;
-Labor force participation edged higher (62.8%); and
-Wage growth was moderate.
-Markets will like all this. It's mixed for the economy.
Finally, why face value: It is hard to know with confidence how best to adjust some of the numbers for strikes, etc.
EUR: We know that the ECB is now taking a neutral stance on rates, with an ‘open-mind’ going into September’s meeting – with inflation falling in most member nations, September’s decision will be increasingly important for the fate of the EURO which is been under a small amount of pressure this year. EUR/USD at 1.0800 is currently at 2.5-month lows
China: Throughout August the data from China has shown declines in all sectors which is definitely going to ripple through the global economy. As China slows down the Politburo has also stated that it will give support to the property sector which has been suffering both in terms of residential property and developers weakening finances.
Main Events this week:
· Monday: ECB President speech
· Tuesday: AUD interest rate decision
· Wednesday: AUD GDP and Bank Governor speech / EUR Retail Sales / USA ISM Services data / Bank of Canada Interest Rate Decision
· Thursday: UK Monetary Policy Hearing. / EUR GDP data / JPY GDP data
· Friday: CAD Unemployment / German Inflation data