Foreign Exchange

Pound Plummets Amid BoE Rate Cut and Political Unrest: What’s Next for the UK Economy?

Posted on by Will R

Last week was a turbulent time for the British pound as it took a significant plunge, largely triggered by the Bank of England’s (BoE) recent interest rate cut. The BoE’s move not only shook the markets but also hinted at the possibility of two more rate cuts before the year ends, causing further concerns among investors. This monetary policy shift was expected to provide a boost to the UK economy, but the recent riots across the country quickly disrupted the narrative that political stability had returned following Labour’s election victory.

This week, the UK economic release schedule is packed, with key data on employment, wages, inflation, and GDP set to be unveiled. These figures will be closely scrutinized by investors and analysts alike, as they will provide critical insights into the state of the UK economy and its future direction. The outcome of these reports could either exacerbate or ease the pound’s current volatility, depending on whether the data aligns with the BoE’s recent actions or signals further economic challenges.

The impact of these developments is not confined to the UK alone. Across Europe, economic announcements are also on the horizon, particularly with a focus on German inflation figures. There’s a 66% probability of a rate cut on September 12th, and any further weakening in German inflation could increase the likelihood of this move. If this occurs, it would mark the first rate cut in Europe since the Covid-19 pandemic, following in the footsteps of the UK’s recent decision.

The GBP/USD exchange rate saw a dramatic drop to a one-month low last week, driven by a global market selloff, civil unrest in the UK, and rising bets on additional BoE interest rate cuts. While the pound managed to claw back some of its losses, the outlook for the currency remains uncertain. This week’s economic data will play a crucial role in determining the future movement of the GBP/USD pair and whether the pound can stabilize or continue its downward trend.

As the week unfolds, all eyes will be on the UK’s economic data releases and their potential impact on the BoE’s next moves. With the ongoing political unrest and economic uncertainty, the pound’s journey through the coming weeks will be anything but smooth. Investors should brace for potential volatility and stay informed as the situation develops.

The British Pound Continues to Falter Amid Interest Rate Cuts

Posted on by Will R

The British Pound has been struggling lately, following the Bank of England’s (BoE) decision to cut its interest rates by 25 basis points last week. This move, aimed at stimulating the UK economy, has had significant repercussions on the currency market. BoE Governor Andrew Bailey emphasized that future rate decisions will be made on a meeting-by-meeting basis. However, market participants are anticipating more rate cuts in September, with a nearly 55% probability of a reduction at the next meeting.

The Euro Benefits from Strong German Economic Data

In contrast, the Euro has seen a boost, thanks to recent positive economic data from Germany. Despite a generally quiet economic calendar for the trading week, European Retail Sales are expected to be a crucial indicator for the Eurozone’s single currency. If the retail sector shows improvement, it could provide further support for the Euro against other currencies.

U.S. Dollar Weakens on Soft Macro Data and Rate Cut Expectations

Meanwhile, the U.S. Dollar has fallen across the board, influenced by softer incoming US macroeconomic data. This has raised concerns about a potential downturn in the world’s largest economy and increased the likelihood of emergency intervention by the Federal Reserve. Currently, market expectations for rate cuts from the Fed have surged, with many investors hoping for an initial double-cut in September.

Looking Ahead: Key Economic Indicators and Market Expectations

As we move closer to September, the anticipation surrounding the next steps of major central banks is growing. The BoE’s future rate decisions will be closely watched, given their potential impact on the British Pound. Similarly, the performance of the Eurozone’s retail sector will be pivotal for the Euro, while the U.S. Dollar’s trajectory will largely depend on how the Federal Reserve addresses the emerging economic challenges.

In summary, the currency markets are in a state of flux, influenced by varying economic indicators and central bank policies. As traders and investors navigate these turbulent waters, all eyes will be on the key economic events and decisions that could shape the financial landscape in the coming months.

Market Update: Currency Movements and Investor Sentiment

Posted on by Will R

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.

A holiday-shortened week

Posted on by Wordpress Admin

The week ahead is disrupted by holidays, with the US closed today for Memorial Day and the UK closed on Thursday and Friday to celebrate the Queen’s Platinum Jubilee.

There are also half-term school holidays in the UK which tends to diminish liquidity, and month-end tomorrow, which should, when combined, add to volatility. Despite the holiday interrupted week, there is plenty to occupy the markets starting this morning with Germany’s Inflation data, followed on Wednesday with the S&P Purchasing Managers Indexes. However, the key data will be released at the back end of the week with the release of the US employment data. As we are becoming accustomed to domestic politics in the UK will continue to dominate the headlines with Boris Johnson looking increasingly vulnerable.

Last week saw the dollar continue to fall for the second week running, following six consecutive weeks of gains. The primary beneficiary was the euro which gained nearly two euro cents over the last seven days. The euro was supported by the increasingly hawkish noises coming from council members of the European Central Bank, who have been talking more frequently about the possibility of a rise in euro interest rates in the summer. There is some scepticism over whether they will be as hawkish as they sound, but we will see in the fullness of time. Still, with the first sounds of hesitation from the US policymakers at the Federal Reserve being heard, it is, for the time being, enough to underpin the single currency. Sterling mainly benefitted from the dollar’s weakness, finishing better on the week whilst trading sideways against the euro to end broadly unchanged.

GBP
As we said previously, with a holiday-shortened week ahead due to the celebrations in the UK for the Queen’s Platinum Jubilee and many traders off to share school half terms with their children, sterling could be in for a relatively quiet time. Sterling ended the week strongly as traders digested Rishi Sunak’s financial statement and calculated the effects of his generosity. It gained ground, particularly on the dollar and has opened this week in a suitable celebratory mood ahead of the week’s festivities. The conclusion seems to be that the giveaways won’t add materially to the inflation outlook in the UK and may actually give the Bank of England a little more room to manoeuvre and move interest rates upwards. Having suffered from fears that the Bank was becoming dovish, sterling recouped some of its losses and enters the new week looking a bit more composed. There is a dearth of economic data this week, with the only noteworthy release being S&P’s final take on May’s Purchasing Managers Index for the Manufacturing sector on Wednesday. The only spokesperson from the Bank of England scheduled to speak this week is Andrew Hauser on Wednesday.

EUR
The euro had a good week gaining on both the dollar and sterling as council members of the European Central Bank revealed their hawkish tendencies just as the Federal Reserve started to float the idea of a pause in their proposed interest rate hikes in September. Whether the ECB actually follow through on their proposed hike, only time will tell, but in the meantime, it was enough to encourage some short-covering and, latterly, some fresh buying of the single currency. With holidays and month-end distorting the market, it will be hard to judge the conviction of this new buying, but at least the council members of the ECB who had been worried by the low level of the euro will now be in a happier place. In contrast to the UK, the eurozone has a busy calendar of data starting this morning with reports on Business, Economic and Consumer Confidence for the bloc and German Inflation. Tomorrow Germany reports its unemployment level whilst the first readings of May’s Consumer Price Index for the eurozone are released by Eurostat. On Wednesday, Markit releases its Purchasing Managers Index for the EU and Eurostat its Unemployment level. Finally, on Friday, Markit will publish its final take on May’s Purchasing Managers Indexes alongside Retail Sales for the EU. Christine Lagarde has an opportunity to air her newfound hawkish credentials when she delivers a speech on Wednesday, and whether Fabio Panetta and Phillip Lane are also converted may become apparent as they also speak in the afternoon.

USD
The US markets are closed today for Memorial Day, but after a strong close from the stock markets and a reassessment of risk, the dollar could come under renewed selling pressure. The inflation data released on Friday did indeed show a softening and possible plateauing of the rise in prices feeding into the narrative that the Federal Reserve may well take time out from hiking rates after their next two rises. This week as always, in the first week of the month, the US Labor Department will publish their full employment report on Friday, which is expected to continue to be good, with the major restraint being worker supply, with nearly two vacancies for each job. With a limited workforce chasing jobs, the upward wage pressure is likely to continue with its associated inflationary impact. Before they are published, ADP releases their private-sector employment report on Wednesday, and on Thursday, the weekly jobless total is posted. Consumer Confidence for May will be published tomorrow, and as elsewhere, Purchasing Managers Indexes are scheduled for release on Wednesday and Friday. There are plenty of policymakers from the Fed speaking this week, and the markets will be listening to see if more talk of a late-summer pause in hiking rates is mentioned. The Fedspeak starts this afternoon with Christopher Waller, followed by John Williams and James Bullard on Wednesday. Thursday, soon to be appointed, Lorie Logan and Loretta Mester step up to the microphone, and Lael Brainard speaks on Friday.

Finally, we hope all our readers enjoy the week’s festivities and will join us in raising a glass of something bubbly to Her Majesty Queen Elizabeth II on the wonderful occasion of her Diamond Jubilee! God Save the Queen!

A tale of two cities

Posted on by Wordpress Admin

The financial markets, both in the major cities, had another traumatic week as investors adjusted their portfolios to reflect rising interest rates.

On Wednesday, the Federal Reserve announced its interest rate decision, followed by the Bank of England on Thursday. The Fed raised the cost of borrowing in the US by 50bps, the first time we have seen a move of this magnitude since 2020. The Fed also inferred that there was a likelihood of another two 50bps hikes at their next meetings in June and July whilst announcing a relatively rapid balance sheet reduction. Although the prospect of a more significant rate hike of 75bps seems to be off the table, the overall tone from the Fed was, as expected, hawkish. In contrast, the Bank of England’s announcements appeared dovish and confused with a split Monetary Policy Committee voting for a token hike of 25bps. Unsurprisingly sterling plummeted whilst the dollar continued its seemingly unending march onwards and upwards.

Sterling also dropped against a resurgent euro, losing over two eurocents during the week, with the single currency possibly benefitting from the European Central Bank keeping a low profile. Although not as bad as feared for the Conservative government, the local poll results didn’t help the background music for sterling and the week, and it looks to have a tricky time ahead. Thankfully, this week, there are no major central bank meetings on the agenda, although there are plenty of speeches from policy makers. There are also some important economic releases on the way, with the reading for March US inflation (CPI) on Wednesday and the first reading of UK Gross Domestic Product (GDP) on Thursday. These figures will be released to nervy stock markets and a fraught geopolitical world. Northern Ireland will also start to reappear as a factor hampering sterling after Sinn Fein’s good showing in last week’s poll results. All in all, another testing week looks ahead for the financial markets.

GBP
If it was the best of times for the dollar, it certainly was the worst of times for sterling as it fell off a proverbial cliff last Thursday lunchtime. The Bank of England seems divided over how to tame inflation whilst forecasting that it may well touch 10% towards the back end of the year. Whilst a 25bps move was as expected, the size of the vote split for the action by policymakers was not. Sterling has now given back all its had earned gains and is back trading at 2020 pandemic levels. Although this was the fourth consecutive hike by the Bank, taking rates to their highest levels since 2013, there appears to be a reluctance to push them any higher, certainly not as high as the money markets had been forecasting. There is also a risk premium starting to come into play, which may gain momentum with Brexit and the Northern Ireland Protocol back in the headlines. This week’s data docket is relatively bare apart from the monthly and quarterly Gross Domestic Product figures. Looking back, January was a strong month in the UK economically, and that should be enough to keep the quarterly figure around 1%. However, the monthly data for March is expected to be poor as the cost of living crisis bites, possibly explaining the Bank of England’s hesitancy last week and, in doing so, adding to sterling’s woes. This afternoon Michael Saunders from the Bank of England will give a speech titled, tantalisingly, “Taking the Right Path”.

EUR
The euro mainly was side-lined last week as the Fed and Bank of England took centre stage, and it ended the week with modest gains against the greenback. It fared better against sterling, gaining over two euro cents on the back of the stuttering performance from the Bank of England. There are now clear hints that the European Central Bank will be looking to tighten policy by the end of the summer and lift interest rates from negative. The euro, of course, will remain under pressure whilst the war in Ukraine shows no likelihood of abating despite its inability to agree on a total embargo on Russian energy imports. The week ahead looks quiet, with Germany’s Consumer Price Index released on Wednesday and eurozone Industrial Production on Friday, the pick of the bunch. Joachim Nagel, head of the Bundesbank, is expected to adopt a hawkish tone when he gives a speech Tomorrow as is Isabel Schnabel who takes to the rostrum both on Wednesday and Friday.

USD
The dollar spent another week challenging commentators to find new superlatives to describe its price action. After the Federal Reserve moved rates up and gave a generally hawkish statement, the dollar again climbed and is now sitting just shy of its highest level for 20 years on the Dollar Index. Risk sentiment remains shaky as the war in Ukraine is worsening and its impact on food and energy prices continues to feed into inflation. Wall Street is also on the back foot, and this is likely to continue as the Fed starts to drain money from the system and yields on US Bonds continue to rise. After better-than-expected employment figures gave the dollar a boost on Friday, this week sees the release of the other key data that the Federal Reserve follows with the publication of April’s Consumer Price Index on Wednesday, which hopefully will show a drop from its recent peak of 8.5%, still way above the Federal Reserve’s 2% target. The only other significant data is the University of Michigan’s Consumer Confidence report on Friday afternoon. However, there are a plethora of speakers from the Fed’s policymaking committee set to air their views. Raphael Bostic starts the ball rolling this afternoon and, tomorrow he returns to the microphone where he is joined by John Williams, Christopher Waller and Loretta Mester. Raphael Bostic is back again on Wednesday after the US inflation data has been released. On Thursday Mary Daly steps up and a busy week for fed speak draws to a close with Neel Kashkari and Loretta Mester on Friday afternoon.

The dollar continues to climb

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Central Banks and their policy choices once again dominated the currency markets last week and will continue to do so as we edge closer to their next meetings.

With interest rates set to rise worldwide, speculation is rife on the quantum of the rises. The most aggressive stance is still being taken by the US Federal Reserve, which continues to say nothing to dissuade investors from anticipating successive increases of 0.5% at their next two meetings and, if some analysts are to be believed, possibly by more. The derivative markets are now pricing in no less than nine back-to-back rises of at least 0.25%. In contrast, the Bank of England is sounding almost dovish, and in the face of gathering problems for the UK economy, this may be prudent. Last but by no means least, even the European Central Bank is now hoping to raise rates by 0.75% by the end of the summer.

The euro initially bounced before giving back most of its gains on the news that Emmanuel Macron was comfortably re-elected on Sunday after gaining nearly 58% of the vote in the Presidential Election. With the French Presidential elections settled, a European embargo on Russian oil is more likely, which will cap any advance by the single currency. The week head is bereft of important economic data until the end of the week when inflation in the eurozone and GDP in the US is released. With a dearth of financial data, speculation over the war in Ukraine will play a more significant role in the markets, and the euro will be on the frontline as it feels the impact of slowing economies, dropping consumer confidence, and rising energy costs. Also fighting for attention will be the bond markets which, after a week of rising yields, may continue to undermine confidence in the equity markets, which could lead to a further search for safe-haven assets. All in all, a challenging week ahead for the euro and the pound was possibly made worse with month-end volatility exaggerating movements.

GBP
Friday’s poor set of retail sales data combined with falling consumer confidence was taken badly by currency traders who pushed sterling sharply lower against the euro and the dollar. It has started the week still on the back foot, having lost nearly two cents over the last seven days and is now sitting near its lowest levels against the dollar for 18 months. On reflection, the hesitancy of Andrew Bailey to be hawkish is understandable; however, the market still sees at least a 0.25% rise in base rate after next week’s meeting of the Bank of England’s Monetary Policy Committee. Whether the appetite is still there to increase the base rate by 0.5% is now open to debate, and this doubt has encouraged the recent sellers. Sterling’s sharp fall will also put pressure on the Bank of England as there is now a danger of importing inflation through a weakened exchange rate. Unusually it’s a barren week for macroeconomic data in the UK, which may not be necessarily a good thing. Attention may turn to Boris Johnson’s problems and his seemingly constant battle to stay as Prime Minister. Campaigning for the local elections, which take place on the same day as the Bank of England meets, will also start to hit the headlines, so we could be in for a nervy week politically, which may feed through to sterling. Tomorrow Sam Woods from the Bank of England is scheduled to speak, and his colleague Sarah Breeden will take to the rostrum on Thursday.

EUR
Despite President Macron winning a second term, the euro is still hovering around its lowest level for two years against the dollar. With the Federal Reserve set on raising the cost of borrowing next week and risk aversion continuing, the euro is likely to stay on the back foot for the time being. This week, investors in the euro can turn their attention back to raw macroeconomic data and the problems the European Central Bank faces. The problem for the ECB is how to start normalising policy and when to start doing so. This was brought into focus on Friday with ISMs Purchasing Manager’s Indexes release. During April, the services sector in the eurozone touched a seven-month high; however, manufacturing PMIs appear to be grinding to a halt. With manufacturing stuttering and inflation growing, it does appear that the eurozone is heading into a period of stagflation. The eurozone has the busiest data docket of all the major currencies this week, starting this morning with the release of the IFO Business sentiment reports for Germany, followed by EU Construction Output. We then have a couple of days without top tier data before Germany releases its preliminary Consumer Price Index and Eurostat publishes a plethora of data, the most important being Consumer and Industrial Confidence. A busy week closes with  German and eurozone GDP and the EU Consumer Price Index. The only speakers due from the European Central Bank are Fabio Panetta this evening and Luis de Guindos on Thursday afternoon.

USD
The Federal Reserve looks nailed on to raise rates in a little over a week, by 0.5% and even if some are to be believed, 0.75%. This should continue to support the dollar, especially against currencies with more circumspect central banks. The prospect of the rise is causing risk assets to come under pressure in particular stock markets, which in turn is strengthening the greenback. A quiet start to the week on the data front is in prospect until Thursday when Gross Domestic Product is released, which is expected to have slowed from the last quarter as Omicron damaged the economy. However, if recent data is believed, this is a blip, and the second quarter GDP should bounce back strongly. Friday sees the release of Personal Consumption Income and Spending, including the April Index, which the Fed will be watching closely. Before that, Durable Goods are released tomorrow, and of course, the weekly jobs data is out on Thursday. There are no speakers from the Federal Reserve this week as they are in their normal blackout period ahead of their monthly meeting on 4th May.

Financial markets get the jitters

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A relatively quiet week sparked into life last Thursday afternoon after the release of a slightly higher than expected Consumer Price Index from the US. At 7.5%, the index is at its highest level for over four decades, and worryingly the core figure is also rising steadily.

In response, yields on US bonds rose sharply, as did interest rate projections in the derivative markets. James Bullard, from the St. Louis Federal Reserve, reacted by suggesting that the cost of borrowing should rise by 1% between now and July and even suggested that the Federal Reserve could hold an emergency meeting and raise rates. This reaction smelt slightly of panic to the markets, and as would be expected, stock markets started to slide, pushing the dollar higher as investors searched for safer assets. Sterling fared better than the euro as expectations are that the Bank of England will again raise rates in March whilst the European Central Bank council members started to dial back their hawkishness.

With a quiet week ahead, at least for economic data, elsewhere attention will switch to the UK this week. With the next meeting of the Bank of England looming, the release of the UK’s inflation indexes this coming Wednesday will be studied with interest. With the increases in energy prices starting to come through into the numbers, expectations are for another jump. Elsewhere geopolitics will continue to unsettle the markets, with President Putin becoming increasingly belligerent over his intentions towards Ukraine whilst President Biden back peddles. Over the weekend tensions escalated with countries, including the UK, advising its citizens to leave Ukraine as fears of a Russian invasion grew. Elsewhere Brexit negotiations still rumble on, as do Boris Johnson’s domestic problems; however, a quieter week on that front with parliament on recess may be on the cards.

GBP
After last weeks inflation shock in the US, the UK takes centre stage this week with the release of both employment and inflation data. First up is the unemployment data, released tomorrow, which is expected to edge lower again to virtually pre virus levels. With markets now expecting further moves upwards in Base Rate at the Bank of England’s next meeting followed by another one in May Wednesday’s Consumer Price Index will be of some importance. Most analysts are looking for a slight drop in January’s headline figure but for it to bounce back and peak in April. If there is no apparent easing in the figure sterling could make further gains in particular against the euro. Also scheduled for release, but not quite as important as the CPI figure, are January’s Retail Sales which are published on Friday.

EUR
The euro was buffeted by the storms that crossed the Atlantic following the release of the US Consumer Price Index and the responses from the mouthpieces of the Federal Reserve. Christine Lagarde’s attempts to soften her hawkish rhetoric of the previous week unsettled the markets, as did the hawkish comments from the new President of the Bundesbank, which highlighted the frictions inherent in the European Central Bank’s council. Contradictory speeches were also delivered by Phillip Lane and Isabel Schnabel leaving the ECB in a catch 22 situation. As well as its internal problems, investors are also nervous about European assets as the temperature continues to rise between NATO and Russia on Europe’s Eastern border, keeping a lid on any advances by the euro. The only data of note due this week was out tomorrow when Employment and Gross Domestic Product for the Eurozone published and the ZEW sentiment surveys for the zone and its constituent countries. However, there are some notable speakers who will have a chance to give more clarity to the ECB’s position. The first opportunity falls to Christine Lagarde today and then Isabel Schnabel has a chance to reiterate her hawkish credentials and Phillip Lane his dovish ones on Thursday.

USD
With minimal top tier data release out of the US this week, the dollar’s direction is likely to be driven by the continuing fall out from last week’s Consumer Price Index. Financial markets are looking for now looking for a rise in rates at the next Federal Reserve meeting on 16th March. The derivative markets are suggesting that there is a better than 50/50 chance of a .5% rise to be followed by at least another four hikes through the rest of the year. However, there is another set of inflation figures released before that meeting and the markets and consequently, the dollar may have got ahead of itself. On Wednesday Retail Sales will be watched for any further signs of weakness that they have shown recently but with the effects of the Omicron variant still evident, some softness may be expected in them.  The only other top tier figures scheduled for release are for Industrial Production, also on Wednesday, and the weekly jobless total on Thursday. Away from data, the market will be studying the minutes from the last FOMC meeting, which are released on Wednesday evening, to see how concerned the Fed really is over inflation.

Scandinavia
Despite a somewhat hawkish Riksbank, the market expected even stronger language from Governor Ingves making the Swedish krona weaken further. It reached levels last seen in early 2020 on Thursday. Focus this week will be on the situation in Ukraine as any talk about military action could potentially have a negative impact on beta currencies such as the krona. On Friday, the latest CPI figures are released and will be closely monitored by market participants. Over in Norway, the country is preparing for ex-Prime Minister and current Head of NATO, Jens Stoltenberg to take over the helm at Norges Bank. Given the previous political affiliation of Herr Stoltenberg, some questions have been raised in regards to his fitness for the role. This week the latest GDP figure is released on Wednesday.

Keeping the earth prosperous

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In the week when world leaders came to together to climate change at COP26 Summit, there was some significant developments and discussions in the markets about keeping the earth both green and prosperous for the next generation.

Keeping Earth Green

GBP:

The scaling back of the row over fishing licences with France failed to give sterling much impetus yesterday, and it has continued to trade in a very narrow range with a slight bias to the downside. The pound is likely to stay trading in a similar fashion ahead of yesterday evening announcement from the Federal Reserve and today’s Monetary Policy Meeting at the Bank of England. The only macro-economic data that may pique investors’ interest is the IHS Markit Purchasing Managers Index for the service sector released later this morning.

EUR:

According to the latest report from IHS Markit, European Purchasing Managers are still worrying about supply bottlenecks, particularly in Germany. The indexes put a little pressure on the euro in quiet trading on Tuesday, and overnight it has slipped slightly against the dollar as the Fed’s decision comes into focus.

Yesterday morning Eurostat published the September Eurozone Unemployment Rate, and later, European Central Bank board member Frank Elderson will speak twice at the Cop26 conference. However, this afternoon’s speech at the celebrations for the 175th anniversary of the Banco de Portugal by ECB President Christine Lagarde may be more enlightening on current ECB policy.

USD:

The US stock market had a slight wobble yesterday as the reality that the end of easy money may be drawing to close hit home. Like its British cousin, the greenback has been trading in a tight range as it awaits this evening’s confirmation that the Federal Reserve will now start tapering its monthly bond purchases by approximately $15bn. During the day, before Jerome Powell takes to the podium at the Fed’s press conference, the first of this week’s employment data is released when ADP publish their predominantly white-collar labour report. Markit and ISM are also scheduled to release Purchasing Managers Indexes for the Service sector, but they are unlikely to shake the markets with such an important event later.

Will dollar continue to dominate?

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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.

Dollar dominates

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

Posted on by Wordpress Admin

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.

Central Banks

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%.