01 September 2023

GBP

The pound found some support throughout the week, with GBP/USD rising from a low of 1.2550 to push back over 1.2750 before moderating somewhat. The path forward is likely to be dominated by broader dollar positioning, with GBP/USD set to follow the direction of other dollar majors. GBP/EUR has declined to back under 1.1700 this week, having tapped a one-year high near 1.1800 on 23rd August.

The movement seems to have been driven by the broadly weaker dollar, following the run of weaker data coming out of the US this week, as opposed to any specific emerging sterling strength. In fact, the few pieces of incoming UK data this week were unlikely to have encouraged sterling bulls – including the latest survey from the British Retail Consortium confirming the UK witnessed the slowest increase in shop prices for almost a year.

The Bank of England's chief economist, Huw Pill, speaking at a monetary policy conference in South Africa yesterday, talked about the potential for "inflicting unnecessary damage" increasing as the Bank moved closer to the end of its hiking cycle while also reiterating that monetary policy would need to be "sufficiently restrictive for sufficiently long" to tame stubbornly high inflation.

The UK housing market is also showing little signs of an imminent recovery, with the latest report from Zoopla indicating overall house sales slipped to levels last seen in 2012.

This commentary does not constitute financial advice

- Jonathan Camenzuli - Corporate Dealer

EUR

The euro, having rallied from under 1.0800 against the dollar to almost 1.0950 throughout the early part of the week, slipped back to under 1.0830 on Thursday afternoon, marking the most significant daily decline for the pair for around five weeks.

The pivot came after data confirmed that recent declines in inflation throughout the region reversed over the last month. The three biggest economies in the EU, Germany, France, Spain, and the region, saw headline inflation accelerate more than expected during August - although on a preliminary basis.

The news could impact the chances of further interest rate hikes in this cycle from the ECB, as the market's expectation of an increase in September edged up. ECB policymakers also seemed to highlight the possibility, with Vice President Luis de Guindos saying the "decision was open" for September's meeting at a panel in Santander, Spain, yesterday. He also spoke about how the inflation outlook hadn't changed according to the ECB's latest forecasts.

The minutes from July's meeting yesterday added to speculation, detailing that "a further rate hike in September would be necessary if there was no convincing evidence that the effect of the cumulative tightening was strong enough to bring underlying inflation down",

There will be another data-heavy week for Europe next week, with regional growth, employment and retail sales due expected.

USD

Having seen a six-week rally, the dollar's recent advance ended abruptly this week, coinciding with a jump in risk appetite.

Incoming US data seemed to largely fuelled the dollar's demise this week, with softer JOLTS (job vacancies) and weaker ADP Non-Farm Payroll data (private payrolls, excluding farms and the government) helping to boost expectations that today's key Non-farm Payrolls (NFP) data will show further signs of moderation in the labour market. The NFP has come in below forecasts for the past two months, having had a positive 14-month run before that.

With inflation and the labour market both cooling, alongside softer-than-expected GDP Growth, expectations that the Fed may have now reached its final (or terminal) rate have increased substantially. The latest market expectations have priced in an 88.5% probability* of a pause at next month's Fed meeting, which will be held on Wednesday, 20th September.

The dollar index (DXY) has subsequently slipped from a 104.00 high to around 102.50, and among the other dollar majors, USD/JPY has reversed around 200 pips from the recent top.

Next week, the latest ISM Services PMI is due to be released. This comes from the Institute of Supply Management, which surveys purchasing managers (excluding the manufacturing industry) to get an indication of their view on the economy.

CAD

USD/CAD has seen moderate declines throughout the week, fuelled partly by the recent rise in oil prices following increased demand from China.

Much like in the UK and US, the Bank of Canada's rate hikes are leading to much slower demand for mortgages, with residential loan growth slipping to 4% for Q3, down from nearly 10% a year earlier.

Canada's GDP Growth data is also released later today, with the expectation that it could be greatly reduced as the Canadian economy continues to moderate. GDP is forecast to have declined by 0.3% over the most recent month and dropped substantially from 3.1% to 1.2% on an annual basis during the past quarter.

The Loonie could be impacted by the release of US employment data today. Unlike its neighbours, Canada will not release its latest employment report until this time next week.

AUD & NZD

As of Friday morning, both AUD/USD and NZD/USD have had their first positive week in the last seven weeks. The Australian dollar has risen from a low of just under 0.6400 to tap 0.6500, and the New Zealand dollar is retesting 0.6000 against the American dollar, respectively.

The Reserve Bank of Australia is anticipated to extend the recent pause in Australian rate hikes when they meet next week, and recent data seems to support that expectation.

Monthly inflation eased more than had been expected, rising by 4.9% during July on an annual basis, against an estimated increase of 5.2%. That is the third monthly slowdown in a row. The exception was the recent rise in retail sales, which rose by 0.5% during July against an estimated increase of 0.3%.

Aside from the RBA rate meeting, the latest growth data will be released in Australia next week, as well as key trade data for July.