Written by Convera’s Market Insights team
All eyes on US jobs report
George Vessey – Lead FX Strategist
Selling pressure on the US dollar stalled last week after the USD index hit its lowest level of July 2023 the week prior following the jumbo Federal Reserve (Fed) rate cut. But China’s stimulus efforts, which added fuel to the global risk rally, sent equities surging higher, with Chinese stocks clocking their best weekly performance since 2008. Commodity-linked currencies, like AUD and NZD soared over 1% against the buck to fresh multi-year highs, but how long will the risk on mood be sustained and could a strong US jobs report partially erase easing bets and reverse recent moves?
Overall, Q3 has been dismal for the buck, on track to slump 5%, which would mark its worst Q3 performance since 2012. Investors are pricing in almost three more rate cuts by the Fed this year on the basis that inflation has been tamed and the Fed has shifted its focus to supporting the labour market. The Fed’s preferred measure of underlying US inflation and household spending rose modestly in August, underscoring a cooling economy and reinforcing expectations for interest-rate cuts. However, this week’s nonfarm payrolls reading will test whether the positive market mood can be sustained. Job growth above 200k should be seen as keeping the soft-landing narrative alive. A number of other data releases bear watching, including the ISM and JOLTS surveys, and jobless claims. With job openings and job growth both expected to have rebounded, this short-term resilience could keep aggressive rate bets off the table for now.
A continuation of the risk rally has already kick-started the new week though, with China’s benchmark equity index up 6.5% on Monday – highlighting the seismic change in investor sentiment. In the FX space, currencies of commodity exporting nations, closely linked with China, remain in high demand.
BoE pricing poses a risk to pound
George Vessey – Lead FX Strategist
GBP/EUR looks primed to score its best Q3 performance since 2014, whilst GBP/USD is on track to record its best Q3 performance since 2012, and its fifth best on record, defying weak seasonal trends. Both currency pairs reached over 2-year highs last week, but upside momentum looks to be waning. If incoming UK data triggers a dovish shift in Bank of England (BoE) rate expectations, the pound’s attractiveness could quickly deteriorate.
The bullish medium-term case for sterling remains intact for now thanks to relative growth differentials, and slower UK disinflation than peers implying a slow and relatively shallow cutting cycle by the BoE. This is why we’ve seen GBP better placed to absorb recent dollar weakness. Plus, with its attractive yield appeal, the pound has enjoyed a fresh leg up recently with elevated risk appetite thanks to China’s stimulus measures boosting pro-cyclical FX. it has underperformed against is Antipodean peers though. The risk sensitive pound will be vulnerable to a correction lower if market sentiment starts souring amid rising geopolitical tensions and the upcoming US election. Moreover, we see the major downside risk being a dovish recalibration of BoE rate expectations given less than two rate cuts are priced in for the remainder of 2024 and only an additional 100 basis priced in over the next 12 months.
This week will see UK GDP data for Q2, BRC shop prices for September and the BoE’s Decision Makers Panel for September. The latter has been signalling that both wage and price growth are slowing fast, which supports our view that the market may be underpricing the pace of BoE easing.
Cooling inflation may prompt ECB to cut in October
Ruta Prieskienyte – Lead FX Strategist
With the announcement of fresh Chinese stimulus fresh in the minds of market participants, euro assets have relished such news. Stoxx50 rallied close to 4% last week, clearing the 5000 barrier, the euro too briefly touched $1.12 not once, but three times, aided by quarter-end volatility, yet continues to struggle to hold above that threshold. Indeed, EUR/USD has only managed to stay above $1.12 for six sessions over the past 30-months, underscoring its difficulty in maintaining higher ground.
With the first Fed rate cut now behind us, the focus is shifting to the ECB’s rate cut pace and the upcoming US election, both of which pose downside risks for the euro. Recent weak economic data, such as poor PMIs and Germany’s Ifo index, highlight growing concerns about the Eurozone’s slowdown. Additionally, softer-than-expected preliminary September inflation data from France as well as Spain has fuelled market bets on an ECB rate cut in October. German yield curve further bull steepened with the yield on a 2-year tenure dropping 15bps last week. Meanwhile the odds of an October rate cut priced into the EUR OIS curve rose from 40% to over 80%.
Despite these bearish signals, EUR/USD has remained resilient, but there’s a strong possibility it could “catch down” to the reality of worsening fundamentals. This week’s German and Eurozone CPI prints could initiate the decline, especially if supported by dovish ECB commentary. Despite the bearishly tilted risks, the breakthrough above $1.12 could come in a shape of this week’s US NFPs. 1-week implied vol for EUR/USD continues to rise and there is a risk of a downside surprise to the payrolls number amid the Hurricane Helene, which could lead markets to expect a more aggressive 50bps Fed rate cut in November, currently priced as a coin toss probability.
AUD and NZD dominate after China’s stimulus measures
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: September 30-October 04
All times are in BST
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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.
