Parky’s quick take: 6 November 2023

What’s the latest with currencies and FX markets this week? Neil Parker, FX Market Strategist, shares his views.

USD loses ground as the labour market cools

The US non-farm payrolls release for October showed a notable cooling in labour demand, albeit it was affected by strike action from autoworkers. However, that did not explain the 100,000+ downward revision to the previous months' payrolls growth, nor the rise in the unemployment rate, cooling of average earnings growth and drop in the labour force participation rate. 

The US labour market has finally shown the effects of the hikes in interest rates from the Federal Reserve, and average earnings growth has been negative for the past three months in real terms on a month on month basis. So the sell-off in the USD, triggered by a sharp reduction in US bond yields, was not unexpected. However, the weakness in the US dollar has to be set against the context that the UK and Euroland economies aren’t performing well either. 

The latest UK labour market data pointed to weakness, and, coupled with the latest figures on retail sales, shows the economy is at risk of contraction into the end of the year. Equally, the latest Euroland labour market news recorded a rise in the unemployment rate, and the most recent PMI (Purchasing Managers’ Index) figures still point to contracting activity rates. Will the USD continue to lose ground to the likes of the GBP and EUR, or is this another example of the UK and Euroland economies not having the momentum to capitalise on the US’s recent troubles?

When looking at the GBP and EUR exchange rates versus the USD, the rebound seen recently appears inconsequential. In order for markets to get more optimistic about these currencies, a sustained break back above $1.26 and $1.0830 in GBPUSD and EURUSD respectively is required, in my opinion. Whilst both currencies are heading in the right direction, I see the recent moves as more of a reflex recovery having endured a prolonged period of weakness. 

Furthermore, this week is unlikely to see the likes of speakers from the Federal Reserve, including Chair Jerome Powell, or speakers from the European Central Bank or Bank of England offer any reason to suspect that official interest rates will move materially quicker than financial markets currently price in. 

So the USD has lost ground, but ultimately the US economy remains the best performing of the major economies, and I suspect the US Fed will remain reluctant to cut interest rates irrespective of the recent cooling in the labour market. We may have to wait until next week, post the October CPI (Consumer Price Index) and retail sales figures from the US, before markets can draw a firmer judgement on whether the US might be willing to bring forward the timing of the first interest rate cut, relative to the UK and Euroland authorities. 

Central banks in Eastern Europe and Latin America to cut interest rates

This week’s central bank meetings include the Reserve Bank of Australia, the National Bank of Poland, Banxico (Mexican central bank), and the central bank of Peru. The RBA (Reserve Bank of Australia) is expected to hike interest rates to 4.35% from 4.1%, albeit the RBA was expected to hike last meeting and didn’t. This time though the quarterly CPI inflation outturn and the retail sales figures have probably tipped the scales in favour of a hike. 

The National Bank of Poland is expected to cut interest rates by 25 basis points, having learnt the lesson that a larger cut could be negatively received by the currency markets, and the Peruvian central bank is also expected to cut by 25 basis points. The only question is whether Banxico will cut interest rates as well? I think not on this occasion, but the central bank might signal that conditions are rapidly moving in favour of a cut, perhaps in the early part of 2024. 

Will the USD’s weakness be helpful in accelerating the timing of interest rate cuts? It depends on how much further the USD has to fall.

This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes. It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in The Netherlands, authorised and supervised by De Nederlandsche Bank, the European Central Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, The Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, The Netherlands. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright © NatWest Markets Plc. All rights reserved.

scroll to top