Written by Convera’s Market Insights team
Strong US data amid rising tensions
Boris Kovacevic – Global Macro Strategist
There is a lot for investors to digest this morning, leading to inconsistent trading patters across financial markets. Strong macro data coming out of the US continues to point to a resilient economy and supports the thesis of a +4% GDP print for Q3. At the same time, China seems to be finding a stronger footing again with today’s data patch surprising to the upside. However, the excitement on the macro side has been dampened by tensions rising in the Middle East, after an explosion at a hospital in Gaza killed hundreds of people. It is still unclear who is responsible for the incident with both sides blaming each other. Still, Arab leaders have cancelled their meeting with US president Joe Biden, who is currently on his way to the region.
The economic data is not weakening as fast or as much as economists had expected against the backdrop of interest rates having risen to 15-year highs. US retail sales continued to push higher in September as households increased their spending of goods and services, leading to upside revisions of the expected Q3 GDP print to 5.4%. Retail sales increased by 0.7% last month, rising for the seventh consecutive month. While there are signs of headwinds emerging for the consumer, like credit card delinquencies rising to an 11-year high, the lagged hard data continued to outperform. Industrial production went up by 0.3% in the same month, beating expectations of a flat reading.
Strong data and rising tensions in the Middle East have pushed crude oil above the $92 mark and are supporting safe havens like gold, which is up around 3% in the last five days. However, the US dollar is not enjoying the same demand. The Greenback is down this morning and flat on the week, even though the probability of another rate hike by the Fed in December increased to 40%.
UK stagflation fears persist
George Vessey – Lead FX Strategist
After UK inflation data provided a clear downside surprise in August, market players were caught off guard with an above-forecast print for September earlier this morning. Sterling jumped on the news, erasing yesterday’s losses across the board after softer wage data. GBP/USD is grappling with $1.22 but needs to close the day at a new weekly high to give it a better chance of breaking north of its recent downtrend. However, surging US yields, elevated geopolitical risks and rising energy prices remain major headwinds, limiting the pound’s upside potential.
UK inflation was unchanged at 6.7% in September, matching August’s reading, and dashing hopes of another fall. Rising oil prices offset downward pressures from food costs and halts months of progress towards easing the pressure on households and keeps the door open to another Bank of England (BoE) rate hike before year-end. Core CPI (which strips out energy, food, alcohol and tobacco) rose by 6.1%, down from 6.2% previously, but was above the consensus forecast of 6%. Annual goods inflation fell slightly but services inflation, which the BoE pays close attention to, surprisingly rose from 6.8% to 6.9%. With more than 80% of Britain’s CPI basket remaining above the BoE’s 2% target, coupled with sluggish economic growth, UK stagflation risks remain elevated.
Money markets show the chance of another BoE rate increase before year-end is little less than 50-50. However, rates are expected to stay elevated for an extended period as officials keep up their battle to bring inflation back to target.
Euro is hoping for a Chinese comeback
Boris Kovacevic – Global Macro Strategist
The euro is getting a lift this morning from stronger than expected data out of China, supporting the view that the second largest economy is bottoming and could be able to achieve the set 5% growth target for this year. EUR/USD is on track to record the second weekly gain since the middle of July as things stand. However, some crucial data points and the speech from Jerome Powell still stand in the way between the common currency and a positive weekly close.
The Chinese economy grew by 1.3% in the third quarter, accelerating from the 0.5% growth rate seen in the previous three months. Both retail sales and industrial production came in better than anticipated, growing by 5.5% (vs. 4.9%) and 4.5% (vs. 4.3%) respectively. The unemployment rate fell from 5.2% to 5%. Yesterday’s release of German and Eurozone economic sentiment, published by the ZEW institute, had largely gone unnoticed, given the focus on global events. As with the US and China, European macro data surprised to the upside. The barometer for how investors assess the prospect of the economy rose in both regions to the highest level since April, creating hopes for a bottoming of European growth.
Overall, the euro is still facing multiple headwinds from higher oil prices, uncertainties about its short-term economic outlook and the upcoming winter session. EUR/USD is currently trading just below the $1.06 level and is positioned in the middle of its 1-month trading range. The pair is still down 5.5% on a three-month basis. However, with US two-year yields at their highest level since 2006, further data surprises out of Europe and China are needed to push the euro higher from here.
CAD softer after inflation miss
George Vessey – Lead FX Strategist
A cooler-than-expected inflation report from Canada yesterday eased expectations that the Bank of Canada (BoC) may still hike interest rates this year. This sent Canadian bond yields lower, whilst US two-year yields jumped the most in one day since July. As a result, USD/CAD snapped a 2-day decline and briefly tested the C$1.37 handle before recoiling.
Despite the spike in crude oil prices recently, because of the escalating conflict in the Middle East, Canada’s annual inflation rate slowed to 3.8% in September, surprising consensus expectations that price growth would have remained unchanged from the previous month at 4%. Underlying core measures also eased, prompting an adjustment in market pricing that the BoC will leave its benchmark rate unchanged at a 22-year high of 5% next week. Money markets now see an 84% chance of a hold, up from 57% before the inflation data.
A continued climb beyond C$1.37 towards fresh 3-year highs cannot be ruled out in the short-term, but upside might be limited around these levels, especially as USD/CAD is 9% above its long-term average.
USD mixed despite 2-yr yield at 2006 highs
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: October 16-20
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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.
