Overlay
Markets

FX outlook Parky's quick take 13 September 2022

What’s happening with currencies this week? Neil Parker, our FX Market Strategist, shares his views.

UK: GBPUSD slumps to 37-year low; UK mourns the death of Queen Elizabeth II

The GBP endured a rollercoaster last week against the USD, falling initially to a new 37-year low at $1.1406 on Wednesday, before rallying above $1.16 on Friday, and continuing that rally in the early stages of this week. It was not the same story against the EUR, where it fell sharply throughout much of the week, and dropped back below $1.15 in the later stages of the week, and has tested fresh 3-month lows in early trade this week.

The cause of the weakness of the GBP was multi-faceted, in part weakness from some of the survey data released last week, also driven by events/data elsewhere, and finally by some revision to expectations of where and when UK interest rates would be tightened further. Notably, last week also saw the passing of Queen Elizabeth II on Thursday, who had been the ruling monarch for over seven decades. As a mark of respect to the Queen, the Bank of England announced it would postpone its Monetary Policy meeting from 15th to 22nd September.

For this week, there has already been the release of July activity figures for GDP, industrial production, services output and construction output. These recorded a modest bounce of 0.2% month-on-month for overall GDP, but only because services output grew 0.4% month-on-month, whereas construction output and industrial production both fell in the latest month. The activity figures were underwhelming, and do not bode well for the remainder of the quarter’s data. In the remainder of this week: labour market statistics for July/August, consumer prices data for August and retail sales volumes data, also for August. The data is expected to record a slowing in the pace of activity and perhaps a slight moderation in UK consumer price inflation.

Whether this will be sufficient to bring about a reduction in interest rate expectations, or any shift in the GBP, we will have to wait and see. For the time being, central bankers appear to still be more concerned about the risks to inflation/inflation expectations than growth. GBP’s bounce needs a lot more momentum before I’ll begin to get excited.

Euroland: ECB hike 75 basis points and indicate more to come despite worsening economic outlook

The European Central Bank (ECB) delivered a 75 basis point rate increase at its meeting last week and indicated that additional tightening would be forthcoming. The risks to inflation were still seen to the topside in the coming months/quarters, and the latest batch of ECB economists’ forecasts pointed to a persistent overshoot versus target through to the end of 2024. The suggestion from some quarters of the ECB is to raise interest rates significantly over the next few meetings, and get interest rates to their terminal rate as soon as possible. However, ECB President Christine Lagarde would not be drawn on where the peak in EUR interest rates would be, preferring only to indicate the ECB would move interest rates to where the data led them.

As far as the economy was concerned, last week saw more evidence of the pressure the Eurozone remains under. The final August services Purchasing Managers’ Index (PMI) reading was 49.8, down from an initial 50.2. The Sentix investor confidence index fell to -31.8 in September from -25.2 in August, and German factory orders for July reported a 1.1% decline after a drop in June as well. There were some positive releases from last week, but the signs of a slowdown are becoming more evident, and the risks of recession continue to grow.

The EUR has bounced against the USD, and also made headway against the GBP over the past week. The only question now is whether the EUR can maintain those gains, or if this is another false dawn. Given that the ECB appears to have greater conviction to tighten policy further, there could be a little additional strength in EURUSD, especially if US releases turnout as expected over the course of this week, in my opinion.

US: wherever the Fed want to get to, they want to get there as fast as possible

Signals from some quarters of the Federal Reserve, including comments from Chair Jerome Powell, suggest that the Federal Reserve is determined in its fight against inflation, and even a sharp reduction in headline consumer price inflation rates will likely be insufficient to prompt any significant change in attitudes from monetary officials.

Last week’s data and surveys recorded a weakening in August services PMI readings, but a strengthening in the Institute for Supply Management Indicator (ISM), another drop in mortgage applications for the latest week, but a fall in jobless claims also, and weaker consumer credit figures for July. Notably though it was the Fed’s Beige Book that took centre stage. This reported 9 of 12 districts reporting slowing price growth, and economic activity unchanged since July. They also noted a noticeable weakening in real estate conditions. Perhaps the Fed should also take note of the $6.1 trillion drop in household net worth in Q2. That was as bad as the slump seen in Q1, although this drop comes after several outsized leaps in 2020 and 2021. This was the largest nominal drop in household net worth since the data set was introduced. 

This week, attention is on the release of August consumer price inflation figures, then on August releases of retail sales and industrial production data later in the week. The Consumer Price Index (CPI) figures are expected to record a sizeable dip in the headline rate, whilst retail sales and industrial production are forecast to stagnate. That’s hardly supportive of significant additional monetary tightening, but the Federal Reserve wants to ensure inflation continues to fall before it ends rate hikes. As for the USD, it has given back some of its gains from the 21-year highs reached last week, and perhaps requires a period of consolidation. The risks for a global economic downturn still make the USD attractive for the foreseeable, in my view.

Central banks: some signs that authorities are preparing to slow the pace of rate increases

Last week saw the Polish, Canadian, Malaysian, and Peruvian central banks all hike interest rates, with the National Bank of Malaysia hiking by more than expected and the Peruvian central bank hiking by less. The Bank of Canada’s (BoC) hike to 3.25% from 2.5% also signalled that they will be more closely watching inflation expectations and global supply disruption in the future. Other central banks around the globe have also signalled that they may be entering an end game as far as the rate hiking cycle is concerned, and are becoming more concerned by the weakness in global economic activity. The BoC reiterated that interest rates would likely have to rise further, but notably indicated that the pace of demand was already slowing.

For this week, the Central Bank of Russia is the only notable meeting due. The Russian economy has suffered a sharp contraction in recent months, since the onset of the invasion of Ukraine. The rouble has also strengthened, at least at an official level, and that provides additional scope for the central bank to cut interest rates, which it is expected to do, bringing interest rates to 7%, the lowest level they have been at since the recovery from the pandemic back in 2021. However, this is unlikely to make any difference to the Russian economy’s performance, with sanctions still putting the squeeze on activity generally, in my opinion.

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