10 March 2023

GBP

It has been a fairly light data agenda in the UK this week, with only the latest Halifax House Price report really catching the eye, confirming that buyers surprisingly returned to the fore throughout the past month, with prices duly increasing by a respectable 1.1% and easily beating estimates of a 0.4% gain. That jump helped to ensure yearly prices have now accelerated by 2.1%, edging analyst estimates of a 2% gain, despite a big drop in prices announced by Nationwide just a week earlier. The property market will take growth at any level at the moment, given increasingly higher interest rates, which has understandably underpinned a rather measly performance for the sector over the past 6 months.

With such a light UK data agenda, GBP/USD has taken its directional impetus from the dollar side of the fence and having traded between 1.1950 – 1.2200 since the beginning of February, GBP/USD finally succumbed to broader dollar strength (see USD), moving to as low as 1.1800 earlier in the week. Despite that drop out of the bottom of the range, the pound has since found a modicum of support, with GBP/USD willingly heading back over 1.1930 through yesterday as the dollar rally wavered. Today’s key US nonfarm payrolls are likely to determine the short-term profile for cable, but beyond that, the wider pound has scope to fare better. GBP/EUR still remains trapped within a broad 1.1200 -1.1400 range which has been in place for the past month.

Next week sees the release of the latest UK employment data, with a slight drop in claims expected and a rather healthy-looking 3.7% overall unemployment rate likely to prevail. Whilst the next BoE meeting is not scheduled until the following week, Andrew Bailey and the team will play close attention to the Labour market before deciding on whether the UK economy is in good enough shape to handle any further rate hikes, as they continue with their ongoing battle against sticky inflation. Recent improvements will have rate bulls in a fairly confident mood.

EUR

The recent trend of softer Euro area economic data continued through this week, with the latest Retail Sales data declining by 2.3% (YoY) through February, as consumers tightened their collective belts, given ongoing increases to the cost of living. Regional growth data also missed estimates, rising by 1.8% on a yearly basis during the last quarter of last year. German data was slightly more of a mix-bag, as weak Retail Sales (down 6.9% YoY) were partially offset by a noteworthy improvement in Industrial Production, with a 3.5% monthly gain during January.

As we accelerate rapidly towards next week’s ECB meeting, market focus is likely to be on what the ECB says about future rate hikes, rather than what they do on the day, given that they have already widely communicated that they expect to raise rates by another 50bps at next week’s meeting, and anything other than that would be a total fail on forward guidance. However, given that recent slump in key data, it has suddenly become much more of a balancing act for the ECB looking ahead, especially when balanced against those recent increases in inflation throughout the region. The ECB’s Robert Holzmann has suggested that the ECB should raise rates by 50bps at each of its next four meetings, given the stubbornly high inflation amongst the region, but Holzmann has been vocally supportive of a more aggressive hiking path for some time, so we should perhaps balance his views against some of the more dovish amongst the ECB.

EUR/USD sold-off fairly aggressively toward the bottom of the range after those Powell comments earlier in the week but has remained fairly constrained between 1.0500 – 1.0700 since the middle of last month. Of course, today’s US payrolls could still have the potential to bust that particular bubble.

USD

The latest testimony from Fed chair Jerome Powell to congress this week has left markets in a bit of a pickle around the size of the next rate hike from the Fed. Powell had unsurprisingly initially implied that the Fed might need to hike rates at a faster pace, resulting in a higher terminal rate, but he then stressed (on the following day) that ‘no decision has been made on this’. However, If you went on the Fed potentially reacting to incoming data alone, then the 50bps hike currently being rapidly priced into markets looks like a done deal, given the super-strong data set through February, coupled with a much slower decline in inflation and future inflation expectations.

However, if the Fed delivers to what markets expect, then Powell & Co will have to deal with the resultant backlash, as going from 50bps to 25bps and back to 50bps, would clearly argue that the Fed was running behind the curve, and take us all back to those torrid transitory territory times again. The other option is for the Fed to stick with 25bps, try to save face and suggest that February was a one-off month, which will then see data get smoothed over time. Some analysts have argued this particular scenario of late. Maybe today’s payrolls, coupled with next week’s inflation data, will give the Fed some wriggle room, as a strong headline payroll gain and ongoing sticky inflation will likely cement market expectations for a 50bps move, or any weakness/softness taking us swiftly back to markets pricing for 25bps again.

So far this week, the latest JOLTS data might be a sign that the recent bumper gains in headline payrolls could gradually be coming to an end, with openings dropping from 11.23M to 10.82M, although with ADP (private payroll) growth also surging by 242k through the past month, the slowdown might still take more time to manifest.

As for the dollar, the greenback remains close to the recent high, driven by those initial comments from Powell on Tuesday, with the dollar index (DXY) moving from 103.75 to 105.40. Looking ahead, expect the DXY to follow the path of US data, with broader risk assets moving in the opposite direction. Amongst the major pairs, USD/JPY has had a particularly active past 24 hours, as markets reacted to the latest, and last BoJ meeting headed by Kuroda. USD/JPY initially declined from a yearly high of 138.00 to 135.50, but has now risen to over 136.50, given that Kuroda opted to leave the building without setting off any YCC fireworks.

Thoughts from the dealing desk

This commentary does not constitute financial advice’ 

-Oliver Taylor, FX Dealer

CAD

The Bank of Canada stuck to the script and paused their programme of rate hikes at the current rate of 4.5% this week, which is precisely what they said that they would do at the last meeting, given expectations of ongoing easing amongst Canadian inflation, and softening amongst key economic data. Having raised Canadian interest rates at eight successive meetings by a total of 425bps, finishing with a 25bps move in January, the BoC will now monitor the impact on the Canadian economy as it became the first major central bank to take a deserved break from hiking rates.

Looking ahead, the BoC did suggest that they were ‘prepared’ to raise rates further if needs be to return inflation to their 2% target, however, most analysts polled by Reuters still widely expect the BoC to remain on hold throughout this year.

USD/CAD reacted to the powerful combination of a pausing BoC and a potentially more aggressive Fed, which ensured that the pair moved back above 1.3800 for a spell for the first time since the end of October. GBP/CAD moved back over 1.6400, highlighting broader Loonie weakness. Looking ahead, today’s Canadian February Labor report is likely to help shape the short-term outlook for the Loonie. Last month saw an impressive 150K headline payroll gains, as overall unemployment remained at a healthy 5%.

AUD & NZD

The RBA raised Australian interest rates by another 25bps to 3.6% during its latest meeting this week, in a move which had been widely anticipated by markets. The RBA has now raised rates by a cumulative 350bps since last May. Despite the hike, the Aussie moved lower, with AUD/USD continuing its recent decline from a 0.7150 high to under 0.6600, driven by comments from the RBA’s Lowe, who said after announcing the latest hike that they are closer to pausing, given that policy was now in restrictive territory. He went on to suggest that the pause could come as soon as the RBA meeting in April.

Next week is dominated by the latest Australian employment data, with the overall unemployment rate anticipated to rise from the current 3.7% to around 3.9%, with a decrease of nearly 20k anticipated amongst headline employment.

Given the lack of keynote New Zealand data this week, NZD/USD has mirrored the performance of AUD/USD, slipping back below 0.6100 for the first time since the end of November.