Written by George Vessey & Boris Kovacevic
Euro breaks 7-day losing streak
The euro broke a 7-day losing streak on Thursday after having fallen to the lowest level yet this year at $1.0450. Investors in Asia are starting to look forward to a boost in spending during China’s upcoming Golden Week holiday, with some high frequency data showing a bottoming of the Chinese economy. A rebound could spell trouble for already tight oil market, pushing Brent crude oil to above $100 a barrel. However, oil prices unexpectedly fell in yesterday’s session on stretched positioning, easing from the highest level since November.
The extremely elevated cross asset correlation meant that falling oil prices translated into weaker yields and higher equities and EM currencies. While the euro won’t be able to avoid falling for an eleventh consecutive week, the longest losing streak in the currency’s history, it will be important for EUR/USD to close the week above $1.05. The last two weeks have been filled with headlines regarding the downside revisions to Germany’s 2024 GDP growth number from multiple institutions, worries about the energy situation going into winter and economic data continuing to disappoint expectations.
And while weaker private sector activity is pushing down inflation in the process, with German CPI having fallen to the lowest (4.5%) level since the war in the Ukraine began – German 10-year government bond yields have continued to push higher to 12-year highs at 2.9%. Financing costs in the European periphery have risen even more than in Germany and France due to the recent difficulty to agree on a budget in Italy, pushing up the euro risk premium (yield difference between Germany and Italy) to above 200 basis points. This has dragged down the euro as well. In short, as long as global yields continue to rise, the environment for a weak euro will remain. Today’s data features Eurozone inflation and a speech by Christine Lagarde.
USD: High growth, high yield, safe haven
The US 10-year government bond yield is currently the most watched indicator in the world. Faced with hawkish Fed members communicating a higher for longer rates regime, a potential US government shutdown and heavy auction sales of US Treasuries, investors have continued their relentless selling of US government bonds. With fears of oil prices going to push beyond a $100 per barrel and inflation not returning to the Fed’s 2% target, yields have continuously been pushed higher in recent weeks. The 10-year yield reached the highest level since 2007 at 4.68% on Thursday and has since then fallen back a bit to 4.5%.
US economic growth for the second quarter remained unrevised at 2.1%. With economists forecasting a growth rate of 3% and the Atlanta Fed GDP Nowcast seeing 4.9% as likely for Q3, the thesis of a resilient US economy has held true. The beacon of hope remains the labor market, which has so remained strong. Last week’s jobless claims have once again surprised the consensus to the downside, only rising from 202 to 204 thousand. Some leading economic indicators like the manufacturing indices from the regional Fed in Chicago, Dallas and Philadelphia have continued to weaken. However, lagged macro data is not responding to weaker survey data as of yet.
The US Dollar Index will most likely rise for the eleventh week in a row, boosted by its current high growth, high yielding safe-haven status. However, would US inflation data released later today disappoint the consensus, the Greenback could fall for a second day in a row, pushing the loss from its multi-month high from Thursday to a bit more than 1%.
Pound extends higher after UK GDP
The British pound snapped a six-session losing streak against the US dollar on Thursday and is extending higher today after data showed the UK economy is in better shape than feared and may be able to handle higher rates if needed. Money markets are now pricing in another rate hike by the Bank of England (BoE) in December. We look to $1.23 as an upside target in the short-term.
The US dollar has taken a breather from its relentless rally this month, but GBP/USD is still on track to suffer its biggest monthly fall of the year as markets trimmed peak rate expectations for the BoE and scoop up the safe haven and high yielding dollar. There have been three distinct phases since 2021 but the third phase just might be coming to an end or at least lose some steam. The first phase was the start of tightening cycle coinciding with the war in Ukraine and the energy crisis, which helped drag GBP/USD to record lows. The second phase since that bottom, was a 10-month recovery as BoE rate expectations soared and the UK economy defied forecasts that it would fall into recession. The latest phase, since July, has been mostly dollar driven due to US exceptionalism, dragging GBP/USD ten cents lower from $1.31 to $1.21.
The sharp rebound from these recent lows was expected given the extreme oversold conditions of the pound, but it’s too soon to tell whether it’s the end of this third phase, and we may still see a test of $1.20. That said, with second quarter UK GDP revised higher and the economy now 1.8% above pre-pandemic levels, the pound is likely to put up a strong fight.
Dollar rally stalls after 10-month peak
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.
