Overlay
Markets

Parky's quick take: 11 July 2023

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

Sterling gains on mixed labour data, Gross Domestic Product eyed

Sterling gained on mixed labour market data at the start of this week. Average Weekly Earnings (AWE) came above economists’ expectations in the three months to May. The headline rate rose to 6.9% year-on-year in May, from an upwardly revised 6.7% in April (vs consensus 6.8%). The ex-bonuses rate was stable at an upwardly revised 7.3% (consensus 7.1%). On the other hand, the softer employment data are significant, with the timely PAYE data showing a -9k fall in June (vs consensus +23k).

Overall, the higher wage inflation will likely maintain pressure on the Bank of England (BoE) to tighten policy and increase the likelihood of a +50 basis-point Bank rate rise in August, in my view. However, the loss of momentum in the employment data is probably more informative vis-a-vis consumer demand over the next 12-18 months. 

Sterling outlook continues to be a balance between near-term interest rates and growth concerns. With market investors discounting a terminal interest rate of ~6.40% from the central bank around the turn of the year, Sterling has found widening interest rate differentials simply too tempting to resist despite growing growth risks. When the UK growth is slowing down in the face of acute mortgage refinancing pressure, should be key for Sterling outlook, in my view. This week’s Gross Domestic Product (GDP) should also be important to provide further insights on the economic impact of rate hikes from the Bank of England, in my opinion.

USD sell off after US nonfarm payroll data show signs of moderation, Consumer Price Index in focus

The USD extends its loss after selling off against the EUR and Sterling last Friday following the June employment report, which showed US labour market has moderated. June nonfarm payrolls were solid (up 209,000, consensus 230,000) but not nearly as robust as Automatic Data Processing Inc (ADP) data signalled. With private payrolls up “only” 149,000 (the softest rise since December 2020), and the prior two months revised down noticeably (net -110,000).

While the trend in private payrolls has slowed, the latest data does not suggest that employment growth has collapsed. The latest three-month average in private payrolls was 196,000 in Q2—a step down from 234,000 averaged in Q1 and 253,000 on average in Q4. Meanwhile, overall earnings data was firmer than expected in June (up 0.4% vs consensus 0.3%) after an upward-revised 0.4% rise (was 0.3%) in May. Despite signs of moderating, there is no sign that labour market conditions have fallen off a cliff. Still-sticky inflation and solid-enough jobs data add to possibilities of the Federal Reserve hiking again in July after the June pause.

Eyes are on US inflation data this week. Base effects will likely pull down inflation measures on a year-over-year basis, but might not prevent the Federal Reserve from hiking further in July, in my view. The inflation report is followed by Producer Price Index (PPI) and preliminary July University of Michigan sentiment in the US. There are also a host of Fed Speakers (including Barr, Daly, Mester, Bostic, Barkin) along with Fed Beige book release.

European Central Bank keeps to hawkish line despite soft data

The EUR started the week on a solid footing despite continued soft data in the region. Last week’s Euro area composite Purchasing Managers’ Indices (PMIs) suggested that activity is stalling on the back of waning services growth and depressed manufacturing.

Overall price pressures were down again this month, led by rapid declines in the manufacturing sector. This week's Germany ZEW* survey expectation index also came in softer than expected. Despite the increasingly obvious slowdown in activity and easing inflationary pressure, European Central Bank (ECB) speakers have kept to their hawkish line. Nevertheless, with US rate expectations moving higher, EUR/USD seems broadly in line with interest rate differentials. How long the central bank’s hawkish stance will remain given recent downside surprises in activity data will be of interest, in my view.

* Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index

Central Banks: A hike from the Bank of Canada while other central banks stand pat

As central banks are close to the end of the tightening cycle, Australia and Malaysia central banks kept their policy rates unchanged last week despite an unexpected 25 basis-point rate hike in their previous meetings.

Poland central bank also held rates unchanged at 6.75% despite some market expectation of a rate cut given the weaker-than-expected CPI data. Whether the central bank will match market investors’ expectation of about 110 basis-points of rate cuts over the next six meetings will be of interest.

This week kicked off with Bank of Israel, which left interest rates unchanged for the first time in over a year after slower inflation. But it signalled that it’s still on alert for the threat of faster inflation.

Wednesday will see New Zealand (RBNZ) and Canada (BoC) central banks meet. The RBNZ will likely pause due to a contraction in GDP growth, while the BoC will likely deliver a hawkish 25 basis-point hike following its surprise 25 basis-point rate hike in June. South Korea and Peru central banks will likely keep rates on hold given inflation has decreased significantly over past several months.

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