Written by Convera’s Market Insights team
Neutral euro at $1.06 awaiting Thursday’s data
Ruta Prieskienyte – FX Strategist
The euro’s quiet push higher extended into yesterday’s session with data out of the US confirming the recent bias for yields and the US dollar to fall. EUR/USD topped the $1.06 handle for the first time since the end of September in what can be described as light trading with missing conviction from investors to move the currency pair significantly higher. All eyes are now on US inflation numbers and headlines from the Middle East to confirm or break this week’s trend in bond yields and EUR/USD.
In a preview ahead of today’s US CPI data release, an upside surprise in the PPI print for September briefly sent EUR/USD to $1.0630 – its highest level since Sept 22nd – before reversing ahead of the FOMC minutes from the September meeting. As expected, the document had a limited impact on financial markets, reinforcing the “higher for longer” narrative. Meanwhile, across the pond, German CPI for September did not budge from the August level at 0.3% m/m and an ECB survey revealed consumer long-run inflation expectations have edged up to 2.5% in August vs 2.4% in July, reaffirming the case that the ECB is on hold for the foreseeable future.
Given today’s lack of economic data out of Europe, US market drivers will be in charge. Hotter than expected US CPI print might put Fed rate hike back on the table, pushing EUR/USD back towards the $1.05 level.
Dollar on track for seventh consecutive fall
Boris Kovacevic – Global Macro Strategist
The US dollar is heading for its worst rout against its peers since 2020 as dovish Fed speak and the implications of the war in the Middle East on US monetary policy become clearer. US policy makers have recently come out in multiple speeches arguing about the decreasing need to raise interest rates any further. With inflation expected to fall and both the US government bond term premium and real yield in positive territory, FOMC members have voiced concerns about overtightening.
Investors have followed their lead and revised down their bets of further tightening with no hikes expected this year. The US Dollar Index is currently on track to fall for the seventh consecutive day with US inflation numbers still looming later today. Markets mostly ignored the minutes from the last Fed meeting mainly because the Fed’s message has changed since then. In September, policy makers revised up their rate projections to add another rate hike to their base case by the end of the year. However, with yields having moved significantly higher since then, some policy makers have pivoted their stance.
Yesterday’s producer price inflation did complicate the picture a bit for the Fed and has put a lot of weight on today’s CPI print. Producer prices increased by 0.5% in September, beating estimates of a 0.3% rise. This constituted the fourth consecutive month that PPI has accelerated on a yearly basis, going from 0.2% growth in June to 2.2% in September. At the same time, US consumer inflation expectations for three years out rose from 2.8% in August to 3% in September, according to the New York Fed.
Government bond yields across the developed world and the US dollar seem to have found a short-term peak last week and have fallen since the beginning of the turmoil in the Middle East. However, both assets remain at risk to upside surprises if commodity prices or inflation prints come in higher than expected. The Greenback is still up against 85% of the world’s currencies in the last three months but has recently given away some of the gains. DXY is currently trading at the 105 mark, well above (5.8%) the July low but below the September (-8%) peak.
UK economy grows again, pound mixed
George Vessey – Lead FX Strategist
Sterling has opened the new session mixed across the board after data showed the UK economy grew in line with expectations in August but shrank more than initially thought in July. Barring any major labour market or inflation data surprises next week, we think the Bank will be content with keeping rates on hold again in November. Markets are pricing just a 20% chance of a hike.
We feel the pound’s 8% fall against the US dollar from July to September was a fair reflection of the impact of a major adjustment needed in interest rate pricing. Peak BoE rates of 6.5%, when sterling’s was at its 2023 peak of $1.31, are now almost 100 basis points lower. UK recession fears could dampen the strength of the pound’s recent rebound from $1.20 though. The UK’s dominant services industry grew by 0.4% last month, offsetting declines in production and construction. The bad news was that heavy rainfall and lower-than-average temperatures in July, saw the GDP reading for that month revised down to a 0.6% drop from 0.5%. This doesn’t bode well for overall growth in the third quarter. Nevertheless, looking at the broader picture, GDP increased by 0.3% in the three months to August 2023, when compared with the three months to May 2023, with growth seen in all sectors.
Assuming we don’t see a strong US inflation report today, we see room for further upside for GBP/USD in the short term to $1.2450, around where the 100-week and 200-day moving averages currently reside. Conversely, we see limited scope for more upside in GBP/EUR, with €1.17 likely to be a major resistance barrier.
Global stocks and gold up over 3%
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: October 9-13
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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.
