Pound slides as China data disappoints
Weaker-than-expected services activity data from China in the early hours has tainted risk appetite. This has weighed on global equities and pro-cyclical currencies, namely the Australian and New Zealand dollars but also the pound and the euro. GBP/USD has slipped under the $1.26 handle, anchored below its 100-day moving average, which keeps downside risks intact. EUR/USD has extended its decline under $1.08 to its lowest point since mid-June, allowing GBP/EUR to hold steady near €1.17.
Domestically, British Retail Consortium data showed UK retail sales jumped 4.3% on a like-for-like basis in August from a year ago – its fastest pace in four months and helped by improved consumer confidence. However, the August figure came in below the 6.8% consumer inflation rate in the UK for July, indicating that sales fell in volume terms. Meanwhile, money markets still show traders believe the Bank of England (BoE) has at least one, if not two, more rate hikes in the pipeline. Part of sterling’s appeal this year has been the prospect of higher interest rates. If the BoE does raise rates twice more, Britain will have the highest interest rates across the G10 – something that has not happened in at least 40 years and will likely limit sterling’s downside bias purely based on its yield advantage.
Moreover, revised official data on Friday showed the UK economy surpassed its pre-COVID-19 size in the final quarter of 2021, a much earlier recovery from the pandemic than previously estimated and ahead of other big European countries like Germany. Still, the UK economic outlook remains bleak in the face of sticky inflation, surging interest rates and rapidly slowing economic activity. With stagflation fears rising, higher interest rates alone may not be enough to propel the pound back to $1.30 any time soon.
Markets in desperate need of stimulus news
The Chinese economic miracle over the past decades has been fuelled by the property market and overreliance on investment as highlighted in our first chart below. With debt levels well above 300% of GDP, this path might become increasingly more difficult to walk for Chinese policymakers. The reforms of the last few years have not supported households enough to make China into a consumption-based economy. Short-term policy stimulus can support the bottoming of the real estate market. However, new growth engines will have to be found in the medium term, which will make the next decade much different than the previous one.
The uncertainty surrounding the Chinese outlook is why investors have become so focused on the latest headlines from the second largest economy in the world. Markets have benefited from a goldilocks US jobs report and the Chinese announcement of a reduction of the mortgage and possibly deposit rates last week. US equity markets jumped by 2.2%, the most in seven weeks. Optimism faded a bit at the weekly open in Europe though as liquidity remained low due to the holiday in the US.
Investors are still waiting for the big stimulus bazooka that some have expected from Beijing. However, all the small measures might add up to something bigger, that could at least halt the economic growth slowdown recently seen in China. The US dollar traded marginally softer against most G10 currencies yesterday but is back on the offensive this morning after China’s services PMI disappointment, as investors wait for more incoming data to confirm a trend.
Ambiguity is the ECB’s best friend
The European Central Bank (ECB) President’s speech left the euro unfazed as Christine Lagarde avoided indicating how likely an interest rate increase would be later this month. Markets are currently betting on the ECB pausing its most aggressive tightening cycle on record, after the central bank delivered nine consecutive rate increases. Last week’s meeting minutes were seen as more dovish than expected as most policy makers did not see another hike as necessary given the lagged effects of monetary policy, the weaker growth outlook and falling inflation.
Christine Lagarde is one of nine policy makers giving speeches or interviews this week. They have two days left to bring their message across to markets as Thursday marks the beginning of the blackout period, two weeks before the next rate decision. Policy makers are then not allowed to comment on anything that could move the market. Investors are currently putting the probability of a hike in September at only 25%, down from the initial 60% seen before the latest economic data releases highlighted the European slowdown.
Expectations of the ECB out hiking the Fed in terms of monetary tightening have completely shrunken to zero in recent weeks. However, the euro has only shed around 4.2% since reaching a multi-month high in July, showing some form of resiliency. After German export data for the month of July disappointed, investors are now looking forward to German factory orders, industrial production and Eurozone retail sales for more insights this week.
Euro dogged by weak global growth prospects
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: September 04-08
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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.
