The past week was a whirlwind of monetary decisions, punctuated by announcements from nine central
banks, surrounded by early-week CPI results and concluding with Friday’s PMIs.
The prevailing narrative centred on the dollar’s strength, which received a boost following the Fed’s
more assertive rate guidance on Wednesday. Nonetheless, the robustness of the dollar was challenged by September’s preliminary PMIs that indicated a faster-than-predicted deceleration in the services sector. Despite this, the DXY maintained its momentum, marking its tenth consecutive week of gains.
The week’s culmination will refocus attention on major central banks as essential data for both the bocce and ECB emerge. For BoC, the pause in policy tightening might be revaluated with upcoming GDP data potentially nudging them toward renewed rate hikes. Meanwhile, in the eurozone, fresh inflation figures will be under the microscope.
Given the persistent inflationary signals in this week’s PMI data, amid declining growth conditions, there’s a looming possibility that the ECB may re-evaluate its hiking pause, especially if signs of stagflation continue to plague the euro’s prospects.
As sentiment on the EUR is fairly negative, a big upside surprise in HICP data could offer some mean reversion opportunities to the upside.
USD 10 weeks of gains
The USD continues its dominant performance as the third quarter nears its end, marking 10 weeks of gains. Notably, the Fed’s dot plot projections, revealed last week, indicate an extension of its tightening cycle, with a revision of the median 2024 rate forecast to 5.1%.
This demonstrates the Fed’s confidence in the US economic outlook, in contrast to other central banks grappling with softer economic indicators. Back in June, markets were projecting a significant gap between their expectations and the Fed’s projections. However, the current gap has narrowed down, with markets pricing an end-2024 Fed rate of 4.67%. If the predicted 2023 hike doesn’t materialize, this projection will further narrow to 4.85%. Although investors should remain cautious, given that previous gaps had indicated a drop to a 4.0% region by end-2024, the USD’s upside risks are more defined now.
The consistent hawkish narrative from the Fed contrasts with weakening global economic indicators.
Friday’s PMIs highlight this discrepancy, with the eurozone hinting at a potential contraction in Q3, while the US shows a mere stagnation. The US employment figures remain robust, with growth in employment accelerating through September.
However, the global market remains on edge due to developments related to China’s Evergrande. Setbacks in the property developer’s debt restructuring process may push it towards liquidation.
This uncertainty casts a shadow over the PBoC’s initiatives to stabilize the yuan. The market will keenly observe how this situation evolves, as well as other important economic data releases, such as EZ CPI and US activity statistics.
Additionally, political developments in Washington could play a role in market dynamics as lawmakers
race against time to approve a new spending bill, preventing a government shutdown. For this week the calendar is very light, so markets could focus more on Fed commentary. Their views could potentially influence market sentiment during this lull period.
In summary, traders should be vigilant of the evolving macroeconomic landscape, balancing the buoyant US economic sentiment against a backdrop of global uncertainties. The US dollar’s trajectory remains upward for now, but external pressures could introduce volatility in the coming weeks.
With CFTC data showing the USD aggregate positioning at the 90th percentile in the last 52-weeks, USD bulls should be weary of the increased chances of a squeeze should a strong negative catalyst present itself in the week ahead.
GBP Struggles as BoE Likely Done
The British pound has taken a hit recently, emerging as the potential laggard in the G10 currency grouping for the third quarter. The most notable turning point was the Bank of England’s (BoE) decision last week. The bank chose to maintain the bank rate,a move that seemed to be on point as it followed weak PMI figures that were lower than anticipated. However, markets have already been pricing in the bank’s move well in advance.
6 Several factors have compounded the Sterling’s woes: Repricing of Rate Expectations: Last week’s decisions by the BoE have led to a significant repricing of domestic rate expectations. With the revelation that inflation is waning quicker than forecasted and recent decisions to keep rates unchanged, the market is increasingly doubtful about further rate hikes. To this effect, the odds of a rate hike in November stand at a mere 25%, with December’s chances being a tossup at 50%. Economic Indicators: Recent PMI data hinted at an accelerated slowdown in the UK economy, exacerbating concerns about the country’s economic prospects. Bank of England’s Stance: The central bank will consider one more set of inflation and wage data before its November meeting.
However, the prevailing sentiment among analysts, including our in-house team, is that the BoE may
maintain rates, signalling the culmination of its tightening cycle. This week’s calendar for the UK is relatively light on major data, with the final second-quarter GDP figures being the notable exception. Additionally, only two BoE members are slated to speak this week. However, given the current trajectory and the absence of any significant releases, it’s unlikely that the market’s stance on the BoE’s future actions will be affected significantly.
From a currency trading perspective:
EUR/GBP: This pair has surged to 0.8700, but maintaining these gains might be challenging. The euro’s momentum is tepid, and much of the dovish repricing in the Sonia curve has already taken place.
However, a robust eurozone CPI might tilt the scales. GBP/USD (Cable): Sterling’s position against the dollar is precarious, and there’s a tangible risk of the pair approaching the crucial 1.2000 mark, especially if the dollar continues its upward trajectory.
In summary, Sterling’s recent descent was precipitated by a combination of economic indicators and the BoE’s policy stance. Traders should keep an ear out for any remarks from BoE speakers this week, as they might provide subtle cues on the central bank’s monetary policy direction.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
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