Cautiousness persists

GBP

It has been a particularly difficult month for the pound, with sterling suffering its most extensive declines since this time last year, after the ill-fated Truss/Kwarteng ‘mini budget’ had inflicted heavy losses for the pound and broader UK asset prices. GBP/USD has seen particularly extended declines as a result of the strong dollar, at one point slipping roughly 4% during September from over 1.2700, to a six-month low of just above 1.2100.

Only a sudden reversal in risk sentiment helped to send the pound back over 1.2200 on Thursday afternoon (against USD). Elsewhere, GBP/JPY has also moved notably lower over the period, despite the BoJ maintaining their ultra-low interest rate policy throughout this period, which has weighed heavily on the yen. GBP/EUR has perhaps been the one outlier, rising back over 1.1550 toward the end of the week.

Aside from that strong dollar, the broader declines for the pound have been fuelled by the BoE’s decision to maintain its key interest rate at 5.25% last week after such a long period of rate hikes, and with market-implied expectations for further BoE hikes subsequently diminishing and clearly feeding into the weaker sterling narrative.

Incoming data has been fairly limited throughout this week; however, the UK housing market continues to wobble under the impact of those cumulative BoE rate hikes, with Zoopla suggesting London sellers are having to accept discounts of  greater than 5% in a bid to secure sales. That represents the highest average discount since early 2019. The Halifax will be releasing their latest update on the UK house market next week. There was some better news on the growth front, with the latest GDP update slightly beating analyst estimates and increasing by a respectable 0.6% during Q2 on an annual basis, having been expected to have increased by 0.4% over the period.

GBP PMI surveys are due for release next week.  

EUR

There was some good news from Germany this week, with confirmation that inflation has now dropped to its lowest level for two-years. The German harmonized index of CPI fell from 6.4% in August to a healthier 4.3% during September, coming in under the 4.5% market expectation. Whilst Spanish inflation may have increased for the second month in a row, it remains at 3.2% overall. Regional inflation was released this morning (Friday) and confirmed inflation has dropped from 5.3% to 4.5% - its lowest level in 2 years. In other news, the latest German IFO survey also beat expectations across the board, with the overall Business Climate, Current Assessment and (future) Expectations all surpassing estimates.

It’s possible that the positive news on inflation will increase the prospects that the ECB will pause Euro area rate hikes at their next meeting, despite the recent rises in energy prices potentially impacting headline inflation.

EUR/USD has now fallen by around 4% throughout the past two months, with the pair reaching a low of 1.0500, a level last tested back in March. However, the sudden increase in risk appetite yesterday (Thursday) afternoon may have helped to put a short-term line in the sand for the single currency. The latest regional Retail Sales data is the main highlight among incoming economic data next week.

USD

As of this morning (Friday), the prospect of a US government shutdown after this weekend remains worryingly high, with a solution to the impasse considered unlikely. As well as the prospect of negatively impacting US credit ratings, the furloughing of hundreds of thousands of federal workers and disrupting all manner of metrics for growth and productivity, the potential shutdown could also result in a delay for the release of key economic data. That would include the likes of inflation and employment reports, which would be suspended indefinitely, according to government officials. That alone could ensure the Fed finishes raising rates, given that they would need the incoming data to support any future rate hikes.

An analysis of the incoming data (that we have been receiving) this week is also likely to further support the case for an ongoing Fed pause, with the latest Core personal consumption expenditures (PCE) price index expected to highlight further moderation among inflation, even if headline CPE is facing short-term upward pressures due to those higher energy prices over the past few months.

In other news, the latest Q2 GDP update matched the previous release of 2.1%. However, there were no material increases amongst this week’s initial jobless claims, which rose to 204K from 202K previously, despite worries over the data being seriously distorted by the ongoing strike in the autos sector. Looking ahead to next week, we would normally be expecting the latest employment report, but as we noted above, this could be delayed due to the impending government shutdown.

The dollar has once again been the big winner over the past week, with the dollar index (DXY) now rising for the 11^th straight week, moving to an intra-week high of 106.49, before consolidating those gains somewhat on Thursday, as a slightly more positive risk backdrop boosted sentiment.

Ironically, the dollar might also be expected to fare well in this uncertain environment, even though it is the US government that is facing the shutdown, given that the dollar would benefit from a weaker risk environment. Among the dollar majors, USD/JPY continues to court much attention, given that the pair remains close to the 150.00 psychological region, which has increased the prosect of BoJ intervention.

CAD

The Canadian dollar has continued to offer a far stronger defence against the resurgent greenback over the past few weeks, with the Loonie boosted by surging energy prices, as oil rises ever-closer to the $100pbl-region. Historically, the Loonie tends to move towards a stronger correlation with oil prices as oil reaches a significant milestone in the cycle, and this has clearly been evidenced over the past few weeks, with USD/CAD slipping from over 1.3600, to under 1.3400 at one point last week.

Whilst higher energy prices may also put upside pressures on Canadian inflation, the latest analyst estimates do not expect any immediate rate hikes from the BoC. Unlike in the US, there is no Canadian planned government shutdown likely to impact the flow of incoming data, so next week’s key September employment report and today’s GDP data should still be released on cue.

AUD & NZD

The recent rises in fuel prices had a direct impact on Australian inflation, with inflation rising from 4.9% to 5.2% on an annual basis during August. Aside from fuel, an increase in rental costs also played a part. That lift in inflation has increased the uncertainty on the outcome for next week’s RBA meeting, with markets unsure as to whether the RBA will be encouraged to make another hike or not.

The RBA may adopt a ‘wait and see’ approach, however, given broadly weaker economic updates elsewhere of late, such as this week’s Retail Sales data, which increased by 0.2% during August, falling short of the 0.3% expectation over the period.

As well as the RBA, the RBNZ are also meeting next week. The consensus for that meeting is for a pause at 5.5%, however, that pause could be accompanied by a more hawkish rhetoric, with incoming economic data having recently been stronger than expected.

Both AUD/USD and NZD/USD have offered a better defence against the resurgent greenback of late, with the former moving back over 0.6460 towards the end of this week, having moved to a 2023-low of 0.6331 previously. NZD/USD is broadly flat during September and remains close to 0.6000. 

Author

Joe Calnan - Corporate Dealing Manager

This commentary does not constitute financial advice and all quoted rates are sourced from Bloomberg.