Weekly Brief

Will there be some Jackson hope for markets?

26 August 2022

GBP

Aside from the ongoing battle to become the next UK prime minister, which if you believe the polls, suggest that Liz Truss is already packing her suitcase for No 10, there has been a bit of a data vacuum in the UK. Well, other than that shockingly weak Manufacturing PMI reading which slipped to 46 from 52.1. With the next BoE meeting still over 2 weeks away (15th September), future sterling direction is therefore likely to continue to be dominated by what is happening to the dollar (see USD) for the most part.

Having fallen from 1.2150 to 1.1800 over three days toward the end of last week, GBP/USD has maintained a slightly stronger foothold throughout this week (so far), moving back over 1.1800, having broken the previous low of 1.1760 this Tuesday. Despite this, the pound does continue to trade with a heavy bias, and that is perhaps not surprising given the deteriorating economic backdrop in the UK making that next BoE decision such a challenging one. When you consider that UK inflation has already reached double-digits and could reach 18% next year, with the cost of living crisis continuing to accelerate, as well as the imminent increase in the energy price cap about to make everything look and feel even more painful, that heavy bias is entirely understandable. Sometimes, no news is therefore good news.  

EUR

The recent combination of weaker Euro-area economic data and a much stronger dollar, combined to ensure that EUR/USD fell back below parity with a bit more sustainability throughout this week. After last month’s fanfare followed by a damp squib, this week’s 3 day run below the magic 1.0000 region is perhaps a stronger reflection of the expectation for future interest rate moves between the two central banks, even if the ECB have been finally stirred into action with that 50bps hike last month.

Next week’s HICP inflation reading is expected to reflect a slight softening for the region from 8.9% to around 8.6%, which may help to ensure that the ECB move forward with greater confidence for caution yet again. This is especially significant at present, given the markets recent appetite to test the ECB’s resolve by steadily pushing-up yields on Italian Bonds. On that note, Hedge Funds have reportedly built-up their biggest short position since 2008. That is a big worry for the ECB, as the last thing that they want at the moment is another Euro area debt crisis. Of course, the first thing that the hedge Funds want is one.

As for the single currency, it might sound odd to say at this juncture, but the market will still pay greater attention to the Fed than the ECB, and so EUR/USD could easily pop back over parity if there is a broader dollar decline unfolding, even if the dark clouds keep circling above Rome and Milan just now.

While for GBP/EUR, sterling is pushing higher on the basis of being in a slightly less than worse position (if we can say that), but that might be like celebrating the fact that you have just finished first in a race with just you in it. A break over 1.1950 would be a stronger signal of impending further sterling strength. Over 1.2000 has capped the upside momentum for some time, and so a meaningful break above here would generate plenty of headlines.  

USD

This week’s Jackson Hole symposium has understandably taken much attention. Not only because it is the first time that all of the major central bankers have met at the famous venue hosted by the Fed since 2019, but also because it gives markets the chance to assess where the Fed (and others) might be in terms of future monetary policy, which means everything for markets, especially future currency direction.

Regrettably, constrains on our publishing schedule dictate that we will not be blessed to assess Chair Powell’s latest Powells of wisdom (sic) before we go to print – he will be giving his keynote speech later today (Friday), but it is fairly safe to suggest that the main issues are likely to remain the same as far as the Fed are concerned. Inflation is obviously the main concern, and Powell is sure to highlight the Fed’s ongoing determination to do whatever it takes to bring inflation back down to the Fed’s goal of 2%. Whilst achieving such a feat looks unlikely for some time, the short-term interesting bit as far as markets are concerned, are whether there are any signs of a change in stance from the Fed that might give us a clue as to whether they are likely to hike by 50bps, 75bps, or any other level for that matter, come their next FOMC meeting toward the end of September.

In all likelihood, Powell will highlight the need for the Fed to continue monitoring incoming data before making any decisions on future interest rate moves, and the recent abandonment of forward guidance will give the FOMC the perfect opportunity to take everything into consideration, before making any decision. On that note, the latest batch of U.S data this week has been a bit of mixed bag. Weaker Pending Home Sales have further highlighted the rapidly weakening U.S housing market, but the fall of 1% was somewhat better than had been predicted. New Home Sales slipped by 12.6%, against expectations of around 7.1%. On the positive side, the super-choppy Durable Goods Orders lived up to their name, rising by 1.2% through July, whilst the latest GDP (Q2) reading was improved from -0.9% to -0.6%, highlighting somewhat stronger revised spending by U.S households. Ahead of the FOMC meeting, there will also be updated data on both the Labor market (next Friday) and Inflation, both of which are far more sensitive given the Fed’s position and mandate.  

As for the dollar, well it has steadily appreciated throughout the week, highlighting the market’s expectation that the Fed will continue to out-hike the rest of them, given the backdrop of a much stronger U.S economy, even if the cracks are getting bigger in more places. The dollar index (DXY) moved as high as 109.00 earlier in the week, which is almost exactly the level it reached before the sharp correction in the middle of July. Whilst dollar bulls may not be rocked out of their dominance just yet, they may be showing a few beads of sweat over the potential of a ‘double top’ forming on the DXY, which could be a strong technical signal of an impending correction, as well as a pretty good throw for all of those lovers of darts amongst us.

CAD

The latest Canadian growth figures, which are released next week (Wednesday), will show whether the recent bout of front-loaded BoC interest rate hikes, has had any dampening effect on the economy. The signs are already there, with a distinctly weaker housing market, and a much-publicised indebted consumer. Any weakness may help to intensify the growing belief that Canada could be headed into a recession next year, even if the BoC are still hoping to achieve a soft landing by front loading those rate hikes.

As for the Loonie, well much like the rest of the bunch, the directional bias has been driven by Washington rather than Ottawa, and so USD/CAD moved back below 1.2900 for a brief spell yesterday, as the greenback paused for breath. As we often say, we like to look beyond USD/CAD to determine the overall health of the Loonie, and judging by GBP/CAD’s move back down from 1.5600 to under 1.5300, the Loonie is still in fine fettle elsewhere.

AUD & NZD

It has not been the best of weeks for economic data in New Zealand and Australia, with New Zealand seeing a 2.3% decline in quarterly Retail Sales against an expected drop of less than 1%. There was also a distinctly weak looking PMI report from Australia, with the Composite slipping to 49.8, from 51.1, and Services also dropping below the key 50 expansion/contraction threshold.

The AUD/USD has fared much better this week, however, rallying to near 0.7000, having slipped to 0.6850 earlier in the week. NZD/USD has not quite been able to keep-up with the pace of the Aussie, moving back over 0.6200, but still well short of the 0.6450 region achieved at the beginning of last week. Looking ahead, next week’s Australian Retail Sales (MoM/Jul) will be closely monitored and the pick of the bunch, with a slight increase from last month’s 0.2% gain on the cards.

 

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