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Parky's quick take: 11 September 2023

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

FX markets still wary of the ranges, but USD looks to dominate

Last week offered greater information in terms of the direction of travel for the FX markets. In GBPUSD and EURUSD, the top of recent ranges is getting further and further away, as markets look at all the macro data and suggest that the US economy remains in the strongest of health in comparison to the UK and Euroland. The US dollar may look to press home that advantage, but a slew of data releases and important events due over the coming weeks, including this week, could muddy the waters somewhat. 

 

There has already been an intervention from the People’s Bank of China, warning against undue speculation prompting the CNY to weaken against the USD, but surely that’s what they want given the Chinese economy is so weak? 

 

Try and ignore the noise that we see in currency markets and focus on the important fundamental messages. Is growth slowing or accelerating? Is inflation coming down, going up or stabilising? Are interest rates likely to rise, fall, or stay the same (and what does this look like versus market expectations)? Overall, on most of these measures, I think the USD is set to make new highs against the GBP, EUR and a host of other major and emerging market currencies. 

European Central Bank rate decision in focus with some still suggesting it’s a close call – it shouldn’t be!

The ECB (European Central Bank) is set to announce its decision on interest rates following the September Governing Council meeting. Some of the ‘hawks’ at the ECB have suggested this decision is a close call. It shouldn’t be. The evidence of further declines in activity, deflation in producer prices and money supply contraction all indicate that no further tightening is required.

 

This week also sees the German ZEW* survey for September and July’s industrial production from Euroland. There are also a lot of interesting releases for August from the US, with consumer price inflation on Wednesday, retail sales and producer prices on Thursday, and industrial production on Friday.

 

Meanwhile from the UK, labour market figures for July are released on Tuesday and July monthly activity figures (Gross Domestic Product (GDP), industrial production, index of services and construction output) are released on Wednesday. Overall, these releases should make little difference to current market opinions, but there are risks of worsening surveys and data from Euroland and the UK that could provide another setback for the GBP and EUR versus the USD.

 

 

* Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index

Rate cuts coming from Ukraine and Peru?

Last week saw rate cuts from the Colombian and Polish central banks, but the National Bank of Poland’s decision to slash interest rates by 75 basis points, when only 25 basis points was expected, prompted a sharp sell-off in the zloty, with EURPLN moving almost 4% higher in the past four sessions.

 

Such a move in the FX rates will discourage any other central banks thinking of doing more than is expected in terms of monetary loosening, suggesting that the path for interest rates when they do start to move lower, will be one of slow and steady.

  

This week sees the Ukrainian and Peruvian central bank meetings, with both central banks expected to cut interest rates. The cut from Ukraine is likely to be in the region of 200 basis points, whilst the reduction from Peru is only expected to be 25 basis points. They could be marginally more aggressive, but I doubt that they will be.

There is also the Russian central bank meeting due. Another hike is possible, but the markets appear to be coalescing around no change. The ruble’s recent stabilisation may be why no further hikes are expected, but could such a decision backfire on the currency?

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