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GBP and EUR still trying higher, but the upside from here is challenging

Both the GBP and EUR have made solid gains against the USD over the course of recent weeks, but it appears that the key driver for this is US dollar weakness. Given some of the mixed messaging from US data and surveys, that’s hardly a surprise. However, the fact remains that the US economy remains the strongest of the main three major economies, and that is unlikely to change over the course of this week. So, for additional upside in GBPUSD and EURUSD, the challenges are recent highs at $1.2423 and $1.0930, and then the January high at $1.2448 for GBPUSD, and early February high for EURUSD at $1.1033, in my view. The weekend announcement of a 1,100,000 cut in OPEC (The Organization of the Petroleum Exporting Countries) production, led by a 500,000 cut by Saudi oil producers, would normally undermine the USD, and whilst there has been a bit of movement, it hasn’t been significant, in my opinion. Whether the USD remains under pressure might be largely driven by this week’s March US non-farm payrolls release. 

US payrolls in focus for clues on the next monetary policy decision

This week has far fewer important data releases for the major economies. There is likely to be interest in the final outturns for services PMIs (Purchasing Managers’ Indices) from Euroland, the UK and the US, and some focus on February industrial production figures from Portugal, France, Spain, and Germany. The main event though is clearly the US non-farm payrolls release, which is due on Friday at 13:30. Will payrolls continue to increase strongly in the final month of Q1, providing another headache for the Federal Reserve’s next meeting in early May? There is also the question over where the rate of unemployment, underemployment and average earnings growth has headed. Employment growth doesn’t necessarily give an objective view of what is happening in the US labour market, and the Fed’s concerns about inflation could be alleviated if the average earnings growth figure retreats. 

As for the improvement in risk appetite and concerns over market stability, there remain signs of US commercial deposits being shifted into money market funds, with the Federal Reserve’s data in the week ending 22 March still reflecting an outflow of deposits (-$132bn), and a separate survey from the Investment Company Institute reporting a record amount stored in money-market funds. So, is the improvement in risk appetite sustainable?

Getting towards the end of the tightening cycle for most central banks?

Aside from the major central banks, there appears to be growing evidence that other central banks in emerging markets and the broad major economies, are also reaching the peak for interest rates. The Bank of Israel has already raised interest rates this week, taking the Base rate to 4.5%, and that is expected to be followed by other central banks this week. The Reserve Bank of New Zealand and the Reserve Bank of India are both expected to tighten by a further 25 basis-points later on this week, but the likes of the Central Bank of Chile, the Reserve Bank of Australia and the National Bank of Poland are all expected to leave interest rates on hold. 

There are signals from most central banks that they expect inflation to fall sharply in the coming months and quarters, and that could give central banks breathing space to pause the monetary tightening cycle if they haven’t done so already. That said, any evidence of renewed currency weakness could be reason for central banks to consider ending that pause in the quarters to come, in my view.

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