Longest weekly winning streak since 2014
The US dollar is heading for its longest weekly winning streak in nine years, encouraged by a resilient run of US economic data that has also put the end of the Federal Reserve’s (Fed) aggressive rate-increase cycle into question. Safe haven dollar demand has also increased as risk aversion resurfaces amid the weaker global economic backdrop.
Backed by a strong economy and rising US Treasury yields, the dollar remains resilient against most major currencies, clipping a 6-month peak as jitters over China and global growth weighed on risk appetite. The world’s reserve currency has recovered almost all of its mid-year losses and is now up over 1% for the year. Alongside an unexpected pick-up in services sector activity, which highlighted lingering inflation risks, US initial jobless claims also came in below forecasts and the lowest since February. A separate report showed worker productivity in the second quarter was not as strong as initially reported, but still remained solid. All in all, strong US economic data and still-tight labour market conditions, puts the US in a superior position relative to other advanced economies, particularly in Europe and China.
The next big data release for the Fed and markets will be next Wednesday when we get the August consumer price inflation report from the US. The headline is seen picking up to 3.6%, but more important is what happens to the core rate, which is seen dropping to 4.3% from 4.7% year-on-year.
Good news for BoE, bad news for pound
Ahead of the Bank of England’s (BoE) next interest rate decision, policymakers will welcome data from the latest Decision Maker Panel (DMP) survey of businesses. The BoE’s own survey suggests price pressures continue to fade. Although this is good news for the BoE, it has dampened market expectations of another rate hike, which is weighing on the pound.
We still expect a hike at the September meeting, but market pricing has dropped from an over 90% probability to about 70% following recent dovish comments from BoE officials and cooling economic activity and inflation data. The DMP survey showed corporate price expectations over the next year is seen at 4.4%, the lowest since November 2021. However, ‘realised’ price growth has been consistently higher than ‘expected’, according to this survey, so the BoE has put less emphasis on it. Instead, policy decision hinge on three key variables, services inflation, private sector wage growth and the vacancy/unemployment ratio, which are all published before the meeting.
GBP/EUR has slipped back towards €1.16 from above €1.17 but remains over 1% above its long-term averages such as its 5-year average near €1.15. It’s worth mentioning that since the Brexit vote in 2016, GBP/EUR has spent nearly 60% of its time below this key level and that in the month of September, GBP/EUR has, on average, depreciated 0.75%. So we wouldn’t be too surprised to see an extended decline in the currency pair in the short-term.
Volatile gas prices to influence ECB?
Chevron LNG workers in Australia will begin partial strikes today after the company and unions failed to reach an agreement on key terms. The facilities on strike accounted for about 7% of global LNG supply in 2022, so European natural gas prices may be further roiled. Could this put further pressure on the European Central Bank (ECB) to hike next week?
Increasing energy prices, with both oil and gas prices surging, will be a concern for the ECB. The Eurozone is an energy dependent economy, so rising import costs could fan inflation fears. However, at the current rate, the EU’s gas storage will be 95% full by mid-September, well in time for the next heating season. Given the combination of ample LNG supply and processing capacity, lower gas demand, and full gas storages, we think gas rationing in winter is very unlikely. The ECB’s meeting next Thursday will be a close call though. Overall, we think the chance that we get another hike is greater than markets think, a scenario that could cushion the euro’s recent slide to its lowest level since early June against the US dollar. Still, EUR/USD is on track for its eighth weekly decline in a row, shedding almost 5% in the process.
This morning we have seen a modest rebound from these lows and EUR/USD has reclaimed the $1.07 handle, which is critical given this is where the currency pair closed 2022. A meaningful close below this level this week could spark further downside risk for the common currency in the short term, but we still expect a euro resurgence perhaps towards year-end or early 2024. For now, the world’s most traded currency pair is trapped below long-term moving averages.
Dollar index gains almost 2% in a week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: September 04-08
Have a question? [email protected]
*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.
