China hitting back in the war for chips
The week is off to a slow start with US markets having ended earlier on Monday and staying closed on Tuesday due to Independence Day. Trading was light and mostly dominated by broader global themes, especially on the geopolitical front. After an astonishing rally during the first half of the year, which saw the US tech-heavy Nasdaq surge by more than 30%, investors now try to gauge where the global economy and monetary policy will develop in the coming months.
Geopolitical events have so far been overshadowed by macro developments. However, yesterday’s news about China introducing export controls of germanium and gallium, two resources crucial for the semiconductor and renewable energy space, from August 1 has increased tensions between the world’s largest economies. Both the European Union and United States import more than half of their germanium and gallium requirements from China. The decision has been seen as China’s retaliation against efforts from the US and its allies (Japan, Netherlands) to limit unlicensed Chinese businesses from buying semiconductor technology back in October.
The impact on broader markets has so far been muted given the lack of liquidity and the uncertainty about the potential hit to the US-China relationship. US equities are slightly up on the week and investors are now awaiting the release of the FOMC meeting minutes for insights about the decision making behind pausing the rate hiking cycle in June.
Fed minutes in focus as July hike still in play
The US dollar remained range bound in yesterday’s trading amidst lower liquidity and uncertainties surrounding the policy path of the major central banks with today’s attention shifting to the Fed’s meeting minutes. Momentum going into European trading appears to be turning negative as Asian equities fell on Wednesday, following weaker-than-expected macro data out of China.
The Caixin Services PMI fell from 57.1 to 53.9 in June, recording the softest pace since January. While the index has been expanding for six consecutive months now, new orders eased to the lowest level since the beginning of the year. Next up will be the services PMIs from Europe, followed by the US ISM services PMI tomorrow. Market participants also expect some insights into the thinking behind the Fed’s decision to pause its rate hiking cycle in June. With inflation risks still skewed to the upside, markets expect the Fed to hike in July with an 88% probability, up from 50% a month ago and 81% a week ago.
EUR/USD turned negative on the week this morning, sitting at around the $1.0880 level. The year-to-date performance of the euro has shrunk to 1.7%, with the recent turn down being driven by markets pricing out any rate cuts by the Fed in 2023. For the first time this year, markets do not expect a meaningful divergence between the ECB and Fed. This has weighed on the common currency.
Pound consolidates as key data eyed
Since recording a record low less than $1.04 last year, GBP/USD has recovered about 22% and is currently undergoing a consolidation phase, oscillating between the $1.26-$1.28 range. Short-term averages like the 5-, 10- and 21-day moving averages offer no real bias, but upward sloping 50-, 100- and 200-day moving averages point to a potential leg higher.
The pound climbed into so-called overbought territory last month, highlighted by a momentum indicator that measures the speed and magnitude of a security’s recent price changes – the Relative Strength Index (RSI) – breaching 70. However, with the pound taking a breather and FX markets being relatively quiet over the last week or two, the RSI has eased back into neutral terrain, whilst GBP/USD has only fallen just over a cent from its 14-month peak. The pound remains underpinned by the Bank of England’s 5% base rate, offering it an attractive yield advantage over many peers, emphasised by rate expectations of 6.25% anticipated by early 2024. This has supported the two-year gilt yield to 15-year highs and the UK-US yield differential to its highest since 2014.
In the current risk-on market environment in which equities are rallying, currencies underpinned by high yields, like the pound, offer investors a desirable return. The UK’s resilient economy of 2023 so far has also been constructive for sterling, but amidst a potentially looming high-interest rate but low-growth environment, sterling may come under selling pressure. Incoming economic data therefore remains critical, starting with final services PMI data today before next week’s UK jobs report and monthly GDP figures.
Dollar steadying as 2023 rate cut bets vanish
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: July 3 – July 7
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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.
