Policy interventions against the dollar
The US dollar faced some resistance at the weekly open in yesterday’s trading with global policymakers becoming increasingly uncomfortable with the currency’s strength. The trade weighted US Dollar Index fell by 0.5% on Monday, the largest daily drop in two months, after having recorded eight consecutive weekly appreciations. With no US economic data to guide markets until Wednesday, politics is playing the role as the market mover.
Global equities have begun the week on a stronger footing with Japan and China stepping up the defense of their currencies. The Peoples Bank of China gave a strong indication that investors should steer clear of destabilising the yuan, while the Bank of Japan hinted at the possibility of shifting its monetary policy stance. Both USD/CNY and USD/JPY pushed lower but have regained some of the losses from yesterday, indicating that investors are still not too comfortable completely dropping the USD.
The first two days of the week are absent of any economic data releases with investors waiting patiently for the US CPI report on Wednesday. Economists expect headline inflation to move up for the second month in a row, while the more important core rate is expected to fall from 4.7% to 4.3%. This might put the dollar in a weaker position all else being equal.
UK labour market softens, wages elevated
UK labour market data was released this morning and showed British wages grew at a record pace again in July, pressuring the Bank of England (BoE) to keep raising interest rates. However, private sector pay barely increased and the unemployment rate rose to a 2-year high, thus the pound is struggling to hold onto $1.25 against the US dollar.
UK wages including bonuses were 8.5% higher than a year ago in the three months to July, beating consensus expectations, whilst wages excluding bonuses were 7.8% higher, matching the record pace set in June. This also means wage growth in real terms, which is adjusted for inflation, rose 1.2% for total pay and 0.6% for regular pay. Although the BoE is hinting at a looming policy pause, persistent wage pressures potentially bolstering core CPI inflation will likely see the BoE delivering a 15th consecutive rate hike next week. Strong divisions are emerging at the BoE though. Governor Andrew Bailey and Chief Economist Huw Pill were far less hawkish than they have been recently, but well-known hawk Catherine Mann warned leaving rates unchanged risks ‘further inflation persistence’.
The market is still pricing an 80% chance of a hike next week and we believe the BoE will deliver. However, signs that the labour market is starting to cool, with the unemployment rate rising to 4.3%, vacancies falling and recruitment difficulties easing, means another hike beyond this month is in doubt.
ECB facing tough decision
The euro has now been below the $1.08 mark for seven consecutive weeks with Hedge Funds turning most bearish on the common currency since January ahead of the meeting of the European Central Bank (ECB). In contrast to other bouts of weakness, the current depreciation of around 5% since the middle of July has not been caused by monetary policy. The euro has largely suffered from the downtrend of the global business cycle and weak industrial activity in Europe.
This has caused investors to decrease their bets of another rate hike by the ECB, with the implied probability of a pause on Thursday standing at 60%. Hedge Funds have cut 90% of their bullish euro bets and have pushed the net speculative positioning into negative territory for the first time since the beginning of the year. It will be hard for the ECB to convince markets that no rate cuts will follow next year given the economic outlook. The internal projections will most likely have to be revised down following the latest economic data out of Germany, which is now expected to contract in 2023.
The European Commission cut their growth forecasts for the Eurozone based on the expected contraction in Germany. The whole bloc is seen expanding by 0.8% this year, down from 1.1%. Germany could fall as much as 0.4% this year with the possibility of recording three negative quarters. The German economic sentiment index will be published later today, which remains in deeply negative territory and is even expected to continue its descent. Apart from that, no important data is scheduled before the ECB meeting on Thursday.
Sterling slightly weaker across the board
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: September 11-15
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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.
