Written by George Vessey & Boris Kovacevic
European FX under pressure
European currency markets are still witnessing the aftermath of last week’s rate decisions. As inflation has continued to come down in recent months with more price indices starting to surprise the consensus to the downside, policymakers have decided to turn down their hawkish rhetoric. The Swiss central bank had unexpectedly decided to halt its one-year tightening cycle, which saw rates rise by a cumulative 200 basis points to the highest level since 2007.
Investors did not take the news well and have continued to sell the Swiss franc against the dollar and euro. USD/CHF is currently on its best streak in more than two decades, rising in 16 consecutive daily trading sessions. However, while the currency pair has hit a fresh six month high at 0.9150 Fr in yesterday’s trading, the franc still trades about 3% above its 10-year average. The same can be said for the European Central Bank (ECB) and the euro. With the ECB deciding to communicate this month’s rate hike as most likely the last one, relentless selling of the euro has not stopped. EUR/USD is on track to fall for the eleventh week in a row with $1.06 becoming the short-term resistance level to breach.
Today started off with some macro data out of China showing industrial production falling by 11.7% in the first eight months of the year but jumping by 17.2% on an annual basis. This is important news for Germany, which struggles to get economic momentum going. The IMK Institute expects Europe’s largest economy to contract by 0.5% this year and growth less than expected in 2024.
A weaker US economy ahead
Consumer confidence and housing data are sending some warning signals about the momentum of the US economy as interest rates continue to search for new multi-year highs. Financing costs for the government, businesses and consumers have continued to rise this year with the Federal Reserve not expected to cut borrowing costs during the first half of 2024.
The Conference Board’s Consumer Confidence Index fell to a 4-month low in September, declining from 108.7 to 103. The drop has been caused by the deterioration of expectations regarding the future state of the economy and labor market. Rising interest rates and high price levels continue to plague the US consumer’s outlook. This can be seen in housing data as well, with new home sales falling by 8.7% in August, the most in 11 months.
Both data disappointments followed already weaker economic data on Monday, which showed the Dallas and Chicago Fed Manufacturing Indices dropping into negative territory. The S&P500 is now down almost 8% from its July high with the US 10-year yield trading well above 4.5%. The Greenback continues to make strides and is pushing higher against most of its peers. The US Dollar Index is trading at around 106 and is therefore well positioned above its long-term (2000-2023) mean of 91.
Woeful September for sterling
Interest rate support for the pound has rapidly diminished recently. US-UK rate spreads have thus widened in the dollar’s favour, dragging GBP/USD 7% lower since July and over 3% lower so far this month, putting the pair on track for its worst month since last year’s “mini” Budget. GBP/EUR is also on track for its worst month since December last year as UK recession fears swell.
Sterling had been the best performing G10 currency for most of 2023, thanks to the UK economy and inflation proving more resilient than expected. This led to investors expecting UK interest rates to remain higher for longer than global peers, providing the pound an attractive yield advantage. However, recent economic data has been noticeably weaker than expected, including inflation, which steered the BoE’s decision to keep interest rates unchanged at 5.25% last week. Investors are now questioning whether this is the peak Bank Rate as opposed to the 6.5% being priced in a couple of months back. This is becoming more a GBP weakness story rather than just a dominant US dollar story, as reflected by sterling’s dismal month-to-date performances versus other peers like the euro (-1.2%), Japanese yen (-2.6), Australian (-3%) and Canadian (-4.5%) dollars.
The higher for longer global interest rate narrative has weighed on global risk sentiment this month too, highlighted by the over 1% fall in the MSCI global stock index this month. The pound’s sensitivity to global stocks remains elevated too, which is another reason why it remains vulnerable. Should the sell-off in equities continue, we expect GBP/USD to fall towards $1.20.
USD/CHF up nearly 2% in a week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: September 25-29
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
