Morning Comment 22.10.21
The single currency has been one of the worst performers in G10 so far this week, only slightly ahead of the US Dollar, as risk sentiment has improved and a number of Euro crosses – for example EUR/GBP, EUR/NOK, EUR/AUD and others – have all moved lower given the uptick in commodities and equity markets. This morning will see the release of the latest regional Manufacturing PMI numbers, including French and German numbers, which will give markets a better idea of the expected growth outlook for Europe in the months ahead. Euro/Dollar remains comfortably within its recent ranges between 1.15 and 1.17 while Euro/Sterling has continued to trade below 85p for most of the week.
Sterling has strengthened for most of the week, following on from comments by Bank of England Governor Bailey last weekend. Since then though there have been a number of factors that have slowed the Pound’s performance; earlier in the week the latest inflation figures were slightly lower than expected while UK Covid case numbers continue to rise which may see some restrictions reintroduced. Added to this, comments from ex-Bank of England MPC members late last night suggested that the BoE are likely to disappoint market expectations of interest rate rises at their meeting in early November while this morning’s Retail Sales also missed forecasts coming in at -1.3% YoY.
The Dollar currently sits bottom of the pile of major currencies as risk sentiment, rising commodity prices and market expectations of increasing interest rates from other central banks have all weighed on the US currency. This week has been light on data but today will see the release of the latest PMI numbers which currency markets will be watching closely. Elsewhere markets remain vigilant for any contagion arising out of Evergrande in China while the price of Bitcoin is also being watched following the commencement of an ETF earlier this week and comments overnight from US Treasury’s Adeyemo that “future sanctions are planned in the crypto space”.Tel: 1800 30 30 03 / +353 (0)1 790 0000
11 Oct 2021
Morning Comment 11.10.21
A busy start to the week on the ECB speaker front as we hear from the ECB’s Villeroy, Lane & De Cos across the day. The issue of the week is inflation and these members of the executive committee recently commented the ECB has the tools to react if needed, however for now, they are in the transitory camp. The single currency ended last week towards the back of the pack in G10 FX with most of the headlines elsewhere and this week has started off along the same vein. EURUSD has remained in a tight range between 1.1550 and 1.1620 for October so far and is likely to sit on the side lines for the early part of this week.
The headlines out of the UK over the weekend came from the Bank of England’s Saunders & Bailey who both sounded Hawkish on the prospect of rate hikes. Saunder’s suggested that the market’s current pricing of rate hikes was “the correct thing to do” and Governor Bailey warned of a “potentially very damaging” period of inflation if the BOE does not react appropriately. This morning the market has priced in 15bps of hikes for the Bank of England in December which has helped support the pound, now trading at year to date highs against the euro and up almost 2% against the USD in the past 10 days.
With the US on a Bank Holiday this morning there is relative quiet in the market. US equity markets fell late last week after a small recovery post the debt ceiling issue being temporarily resolved. On Friday, the US employment report for August was the key data point; even though the headline was lower than expected (194k vs 500k), there was decent revisions to the previous month (+131k) and the household survey was strong. The 3 month average (which Powell referenced at the September Fed meeting) is at 537K – that should mean we hear an announcement of a taper of asset purchases at the November meeting. The USD has consolidated some recent gains in the past week but could progress from here.
8 Oct 2021
Morning Comment 08.10.21
uro/Dollar price action has been pretty muted this week, trading a tight range between 1.1530 and 1.1630 ahead of the US employment report for June later this afternoon (see US section). Yesterday, we heard that the ECB are studying a new bond-buying program to prevent market turmoil, particularly in periphery spreads, for when the existing pandemic tool ends next March. The new program would complement the existing APP program which is buying €20bn a month of European sovereign bonds, however no decisions have been made as yet. In other news, ECB Chief Economist Lane spoke yesterday, noting that Europe is very far from the “red zone” on inflation – he described that zone as one where inflation is persistently above target of 2%. At present, inflation prints in the Euro Area are well above 2% but expected to fall back below target next year.
Chief Economist Huw Pill of the Bank of England spoke to the TSC yesterday noting that inflation has been rising faster than expected, and may last longer than expected. The Bank of England still believe that the recent increase in prices will be temporary, however it is the magnitude and duration of the spike that has surprised them. At present, there are 13bp on interest rate rises priced for the December meeting this year. PM Boris Johnson spoke on Wednesday evening laying out his vision for the future of the UK economy – a radical transformation of the economy into one characterised by highly skilled workers earning higher wages. Euro/Sterling sits back at the bottom of the 85/87p range with the pricing for the Bank of England providing a ceiling, while Sterling/Dollar has recovered over 1% to just below 1.36 as global risk sentiment improved.
The key data point of the week, the US employment report for September, will be released later this afternoon where economists are calling for the addition of another 500k jobs to the economy, with average hourly earnings reaching 4.6% on the year. Risks are potentially skewed to the upside for today’s number given enhanced unemployment benefits rolled off for millions of Americans on the 5th
September, many schools have returned which eases some childcare pressure, and the delta wave of Covid-19 has peaked in the US. A poor print is not expected to delay the Federal Reserve’s plans to announce a taper of asset purchases at the November meeting. In other news, the Senate voted to increase the debt ceiling by $480bln which will set up the next deadline for Dec 3, according to the Treasury Department.
6 Oct 2021
Morning Comment 06.10.21
ECB President Lagarde has said the central bank is paying close attention to inflation expectations and wage developments in the Eurozone, while stressing that it is difficult to predict how persistent the supply side issues economies are facing will be. The ECB still believe the current spike in prices will be transitory and that the rise will moderate next year – several ECB committee members have stressed that monetary policy cannot directly affect the current supply side problem, and that they should not overreact to short term factors. Euro/Dollar continues to sit just below the recent support at 1.16.
Natural gas prices in the UK continue to surge to record high levels in a fuel supply crunch that is impacting industries from manufacturing to producing, and could increase living costs. Ten year interest rates in the UK have risen to the highest level since May 2019, while indicators of inflation are now at the highest level since 2008. This has prompted the market to price an almost 50% chance of a 15bp hike in interest rates at the coming November meeting. Euro/Sterling moved to the top of the 85/87p range last week as global risk sentiment soured, however the pound has recovered to trade just above 85p.
The key data point this week in the US is on Friday in the shape of the September employment report where 500k jobs are expected to be added to the economy, with the unemployment rate falling to 5.1%. At the September FOMC meeting, Chair Powell did not expect that a weaker report would delay an announcement of tapering which is expected to be announced at the November FOMC meeting. Elsewhere, negotiations around the debt limit continue between Democrats and Republicans where congress has until October 18th to raise the limit to risk defaulting on debt obligations.
29 Sep 2021
Morning Comment 29.09.21
Tomorrow will see the release of September CPI numbers for Germany where a rise of 4.2% on the year is expected – the ECB have continued to play down the rise in inflation and expect it to fall back below target in 2022 as the recent spike is considered transitory. Yesterday, President Lagarde spoke at the economic conference in Sintra and expanded on the ECB inflation framework. It didn’t move the dial for markets but she was optimistic on the future trajectory of inflation in the Eurozone which may suggest upside for the ECB’s inflation forecasts for 2024. Euro/Dollar sank below the August low at 1.1665 this morning amid a wave of dollar strength given the hawkish Federal Reserve– 1.16 is the next support level.
Sterling fell by almost 1.5% yesterday, trading to two month lows against the Euro and the lowest levels since January against the Dollar. The Pound had been the best performing currency so far this year but most of that performance came at the beginning of the year when the UK were driving a swift vaccination rollout and the uncertainty surrounding Brexit ended following the deal agreed late last year. In recent week however, the UK has seen a number of supply-related issues across the economy with queues at petrol stations just the latest area of concern. Despite the Bank of England highlighting the potential for interest rates to rise at their meeting last week, currency markets have become increasingly concerns that the UK economy could face ‘stagflation’ i.e. high inflation and low growth in the coming quarters.
The US Dollar has been the strongest currency in G10 this week, accelerating the most versus Sterling (see GBP section). This week has seen significant dollar buying post the hawkish September Federal Reserve meeting last week – 5 year US interest rates have risen over 20bp since the meeting, and the first 25bp hike from the Federal Reserve is now priced for late 2022. At present, the Federal Reserve intend to announce a taper of asset purchase at the November meeting, with Chair Powell noting the taper may finish in mid-2022. ISM manufacturing for September is the key data point this week on Friday afternoon.