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Euro
Trade Disputes
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Global Uncertainties
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Market Uncertainty
The British Pound is under pressure due to the UK’s growing debt, weak economic growth, and rising debt servicing costs. Ahead of the Spring Statement, concerns mount about whether Chancellor Rachel Reeves’ proposed £15 billion in public spending cuts will be sufficient. As the Pound holds steady against the Euro and US Dollar, analysts warn that insufficient fiscal action could lead to higher debt costs and further economic challenges for the UK.
The Euro weakened as it faced pressure following mixed PMI data. Manufacturing in the EU showed strength, particularly in Germany, but services remained weak in countries like France. This uneven economic performance raised concerns about growth, and the Euro’s decline was further influenced by expectations of upcoming US tariffs on April 2. These factors combined to weigh on the Euro amidst broader global market uncertainty.
The U.S. Dollar remained steady after four consecutive gains, with the Dollar Index holding at 104.29. Analysts highlighted the Federal Reserve’s cautious stance on rate cuts, which supported the greenback. With the upcoming US tariff implementation on April 2nd, concerns about potential market volatility are growing, particularly regarding the selective tariff policy that could impact global trade.
Structural Changes
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Risk Aversion
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Trade Developments
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Market Update: Currency Movements and Investor Sentiment
GBP Struggles Amid Fiscal Concerns
Yesterday, the British Pound faced a challenging start as concerns over the UK’s fiscal health and potential tax increases unnerved investors. The anxiety came ahead of Chancellor Rachel Reeves’ address to Parliament, where she was expected to outline the government’s fiscal plans. Despite the initial volatility, reassurances from Cabinet Officer minister Pat McFadden that no tax announcements were imminent helped to calm the markets, reducing some of the pressure on the GBP.
EUR Remains Static Amid Lack of Data
The Euro struggled to capitalize on the Pound’s difficulties, primarily due to a lack of significant economic data from the Eurozone. Investors in the EUR were hesitant to make bold moves ahead of critical data releases later in the week, including the Eurozone’s GDP figures for the second quarter and July’s inflation data. These upcoming reports are expected to provide more direction for the common currency.
USD Finds Support Ahead of Federal Reserve Meeting
The U.S. Dollar managed to regain some ground, driven by anticipation of the upcoming Federal Reserve meeting. Investor speculation centered on whether the Fed would signal any rate cuts, with soft inflation readings and dovish comments from Fed officials bolstering expectations of a 25 basis point cut in September. This anticipation led to increased flows into the greenback, reinforcing its position in the market.
Looking Ahead
As the week progresses, investors will be closely monitoring key economic indicators and policy announcements. For the GBP, continued clarity on the UK government’s fiscal strategy will be crucial. The EUR will likely see more movement post the release of the Eurozone’s economic data. Meanwhile, all eyes will remain on the Federal Reserve’s actions and signals, which will be pivotal for the USD’s trajectory.
Stay tuned for more updates as we continue to track these developments and their implications for the foreign exchange market. For personalized advice and detailed market analysis, please contact our team at Synergy Exchange.
Will dollar continue to dominate?
Last week the markets were dominated by the strength of the US dollar, which took sterling down to nearly three cents off September’s highest level, with the euro also giving up a similar amount.
Flows into the dollar were encouraged by the rise in yields on US treasuries and it’s safe-haven appeal as equity markets came under pressure. Much of the move was caused by the quarter-end rebalancing of portfolios, which created more volatility across all asset classes than has been the case recently. The dollar was also pushed higher as currency derivative traders in the options market were caught out by the speed of the moves and had to rapidly hedge positions.
The market enters the fourth quarter of the year in a suitably nervous mood. Many brokers will remember the stormy weather and equally turbulent markets that led to the stock market crash in October 1987. This month tends to be tricky for equities, and with the world’s financial markets intertwined, the currency markets can also be volatile. Policy tightening in the US now looks imminent, possibly as soon as November if this week’s employment data is reasonably strong.
Also of interest will be the outcome of today’s OPEC+ meeting. With global energy supply problems, threatening to push inflation higher, traders will be keeping an eye on whether they turn on the metaphorical taps. Finally, as always, politics will play out in the background both in Germany and closer to home, where an under pressure Conservative Party will hold its annual conference.
UK
Worries early last week over the possibilities of 1970’s stagflation reappearing in the UK combined with quarter-end pressures and pushed sterling sharply lower against the dollar. It recovered some ground during the week but remains at the mercy of King dollar. It fared better against the euro ending the week unchanged. With The Governor of the Bank of England hinting at a rate rise before the end of 2021 and the money markets looking for three rate hikes next year, sterling should continue to hold its ground against the single currency and possibly grind higher. This is not to say that there are no problems on the horizon for sterling. Energy supplies are causing concern due to a lack of storage facilities for natural gas and, almost unbelievably after last weekend’s weather, a lack of wind to turn turbines. The Conservative Party conference takes place this week, and this may present the government an opportunity to put their case over Northern Ireland and trigger article 16. Macroeconomic data is pretty thin on the ground, with only September’s final Composite Purchasing Manager’s Index (PMI) released tomorrow, which may just have fallen back from August’s 54.1. The Bank of England is scheduled to release its Quarterly Report on Friday, and the Bank of England’s hawkish Dave Ramsden speaks on Tuesday.
EUR
The euro had a tough week dropping quite sharply against the dollar, which was no surprise considering the European Central Bank’s (ECB) dovish stance over inflation. It was also damaged by the risk-off mood permeating the markets. Whether the ECB is still relaxed over inflationary pressures after September’s headline figure touched 3.4% will become apparent with speeches scheduled this week from Christine Lagarde and Phillip Lane, both of whom are doves. As discussed last week, the horse-trading over who will lead Germany is now in full flow and looks set to continue for several months to come with a Green/Socialist coalition looking the most likely outcome. Tomorrow Eurostat will publish Europe’s Producer Price Index, and Markit will release their Composite PMIs for the Eurozone and the countries that constitute it. On Wednesday, the EU’s Retail Sales are reported; this Thursday, Germany will release their Industrial Production data, and the ECB will publish the minutes of its most recent meeting.
US
Moves in the stock market and risk sentiment are likely to be the dominating factor at the start of the week as we wait for the latest employment statistics from the US Labor Department on Friday. Despite China remaining shut all week for holidays, the market’s worries over Evergrande are still bubbling under the surface, and equities may be volatile again. With speakers from the Fed starting to sound concerned over inflation, the stage looks set for a start to a tapering of QE next month.
If Friday’s Non-Farm Payroll shows new jobs in the region of 500,000, the market will take this as a virtual confirmation that policy will change sooner rather than later. Although now possibly in overbought territory, the dollar should continue to stay in favour as it continues to benefit from what is called the dollar smile. The smile reflects the dollar’s direction; one side points up when yields rise due to a strong economy, and the other side points up when the markets become risk-averse. By the end of the week, we will know if the dollar is grinning or grimacing.
The data week starts tomorrow when Markit releases its composite PMI and ISM publishes its Services PMI. The first of this week’s three employment reports are published on Wednesday, the ADP white-collar numbers, which will be watched more closely than usual for clues to Friday’s data. These are followed on Thursday with the weekly jobs number and finally, the big one, Friday’s Non-Farm Payroll.
Scandi
The Swedish Krona had a relatively quiet end to the quarter and remained stuck within the range it has been trading for most of 2021. The fourth quarter has historically been a krona positive month, and most market participants expect this quarter to be no exception. This week we will get the latest Industrial Order and the Household Consumption figures. Both are expected to show an expansion.
In Norway, the krone finished the month on a strong note and is at its highest level against the euro for the year but for a brief spell in April. The ever-increasing demand for oil and general shortages are certainly assisting, but the fact that Norges Bank raised interest rates should not be overlooked. This week we will get the GDP figure on Friday. The economy is expected to have grown 0.9%, an increase of 0.4% compared to last year.
Farewell Mrs Merkel
In the week that Angela Merkel stepped down from her prominent as Chancellor of Germany, there was some significant developments with Central Banks on the markets last week.
Central Banks dominated the markets last week with what at times appeared an overload of information emanating from every corner of the globe. The most positive action was taken by the Norges Bank, which became the first G10 central bank to increase interest rates since the pandemic began. The Bank of England was a little more intriguing, but there is a clear shift in expectations in the Monetary Policy Committee (MPC), and this has been reflected in the derivative markets who are now signalling a rate rise, albeit by only 0.15%, next February. The US Federal Reserve were not quite so aggressive, but the “dot plot “did show that committee members were bringing forward the timing of the first move upwards of interest rates to 2022 from 2023. As expected, with the European Central Bank still some months away from tightening, the euro retreated against both sterling and the dollar.
The week began with a sharp sell by the world’s stock markets and a subsequent flight to the safe-haven dollar pushing beta currencies such as sterling south. The potential collapse of the Chinese real estate group Evergrande triggered the move. Although the panic had subsided by Tuesday, the spectre of Evergrande defaulting is still haunting the market and may reappear this coming week. The Social Democrats (SPD) scored a narrow win in the German election yesterday but cannot, as yet form a government. The country now faces months of horse-trading before a coalition is agreed upon and formed. With a relatively quiet week in prospect from a macro-economic perspective, the fallout from the election in Germany will be the dominating factor, certainly in the early part of the week.
GBP
Sterling had an eventful week, initially falling in reaction to Wall Street’s woes before recovering after the Bank of England sprang a hawkish surprise on the markets. The market, as is the MPC, remain divided over the threat of inflation, but with gas prices rising and supply chain difficulties causing shortages, it is hard not to side with the hawks. Indeed, the Bank of England itself is now forecasting inflation to touch 4% by year-end. The GfK Consumer confidence index, released on Friday, has slumped, and despite the Bank’s hawkishness, sterling is starting to look a little vulnerable. It certainly has some headwinds to negotiate with both furlough ending and the problems over the Irish protocol still rumbling in the background. The coming week hasn’t got the fullest data docket with only second-tier data scheduled apart from second-quarter GDP on Thursday.
EUR
Yesterday’s German election failed to deliver a clear winner, and the country now faces a protracted period of negotiation between all the parties. The SPD finished slightly ahead and, at the moment, look favourites to team up with the Greens and one or more of the smaller parties. Angela Merkel will stay as Chancellor until a new government is formed but, in effect, is now a lame-duck politician at a time when Germany and Europe are recovering from the pandemic and need leadership. All markets dislike uncertainty, and it now looks like that is firmly on the cards, possibly for several months. Germany releases its October Gfk Consumer Sentiment data tomorrow, followed by September’s Unemployment level and Consumer Price Index (CPI) on Thursday and Retail Sales on Friday. Usually, these would have the potential to move the euro; however, with the election overhanging the market, any reaction will be limited. The most meaningful data will be the release on Thursday of September’s Eurozone CPI forecast to rise to an annual rate of 3.4%. If it exceeds this level, inflation fears will rear their head, giving the ECB a headache and encourage the hawks in its midst. Before that, Eurozone Consumer Confidence will be reported on Wednesday. The two most influential members of the ECB, Christine Lagarde and Phillip Lane are slated to speak.
USD
The Fed made a decisive move towards tightening its policy last week, and surprisingly, the dollar did not react as strongly as expected. With the yield on US Treasury bonds increasing, the dollar should attract further fans in the week to come, especially if the stock markets start to wobble again. It is quite a busy week for data in the US, with the highlights crammed into next Friday when Gross Domestic Product, Personal Income, and the Feds favourite number, the Core Personal Consumer Expenditure deflator, are all released. Before those, we have Durable Goods to digest this afternoon, Consumer Confidence tomorrow, and on Thursday, the weekly jobless claims total. Possibly as influential for the markets will be the plethora of speakers from the Fed, including Chairman Jerome Powell, who will take to the podium twice. Treasury Secretary Janet Yellen will join him as the US debt ceiling issues continue unresolved. With month and quarter-end on Thursday and October 1st set as the date to approve a stopgap government funding limit, time is rapidly running out, and some nervous times lie ahead.
Scandi
The Swedish Riksbank kept its main benchmark rate unchanged, and Governor Ingves did not tell the market anything new after its meeting last week. The Swedish krone finished the week stronger but is still within the range it has been trading in throughout 2021. This week the latest Retail Sales figures are released on Tuesday alongside the Trade Balance, and on Wednesday, the Consumer Confidence indicator is published.
Norges Bank Governor Olsen did what the market predicted for a very long time and increased the benchmark rate by 25 basis points to 0.25. He cited the ever-improving economy in Europe’s second-wealthiest country and adjusted the rate path higher. The next hike is expected to come in December, just before Christmas. This week we are anticipating the latest unemployment figure, which is expected to have come down further to 2.5% from 2.7%.