Overlay
Markets

Parky's quick take: 25 September 2023

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

UK Bank of England decision creates more headaches for the GBP after consumer price inflation undershoot

What’s done is done, but I think the BoE (Bank of England) may regret the decision to leave interest rates on hold last week. Instead of taking the heat away from the next meeting in November, before which there will be more inflation data, it instead chose, by the barest of margins, to intensify the risks around that meeting in my opinion. 

It is fair to say that the BoE might realistically have three potential decisions to pick from at the November Monetary Policy Committee. It could hold, hike 25 basis points, or hike 50 basis points, and we won’t know which path the BoE will take until after the August average earnings and September consumer price inflation figures. So it would appear, on the surface at least, that the next monetary policy decision, and perhaps the one after that, could see the BoE chasing the data, in my view.

After last week’s data and decision, the pound suffered against the US dollar and the euro. The push in GBPUSD below $1.23, to fresh lows for over six months, was also coupled with a move to below €1.15 in GBPEUR, to levels last seen back in mid-July. The pound appears to have further headaches in store for it this week, and we could see fresh lows if the UK figures show a further slowing in consumer credit growth and an additional drop in the money supply.

We could be looking at the pound closing out the quarter at its lows versus the USD, which wouldn’t bode well for the run in to the end of the year, in my opinion. The BoE may have to consider itself in part responsible for increasing the volatility in the GBP, without materially improving the outlook for the economy.  

Also this week, the Euroland release calendar is full of interesting releases. Already on Monday we’ve had the release of German IFO* business climate index for September. That came in at 85.7, the same reading as in August. A higher reading from expectations and less of a fall in current conditions created the unchanged reading.

For the remainder of this week, the interest will switch first to Euroland M3 money supply for August, which could record an even greater contraction than that seen in July, followed by Euroland confidence indicators for September and the Euroland flash estimate for September consumer price inflation. There are some other releases from the various states that will be of interest, but the performance of the euro is likely to be mostly determined by the outcome of these releases. EURUSD appears to have found support for now in the low $1.06 region, but it is still at the bottom of recent trading ranges. If there are some downside surprises to the data releases, then the risks are for a move below $1.06 which would open the door to a move to $1.04 and then towards $1.02, in my view.

From the US, last week saw more struggles for the US housing market, and this week could be challenging as well, with the final Q2 GDP (Gross Domestic Product) figures and two sets of consumer confidence readings for September due. With the Fed having indicated that there could still be one more rate increase in the pipeline before the end of the year, the FX markets will want to see the data to support or undermine that argument be more consistent than it has been recently. There are a few important speeches from Federal Reserve officials, but I doubt we’ll learn much from those speeches that wasn’t in the Fed statement or new dot plots. If there are some further signs of weakness from the consumer confidence surveys, then the US dollar could be put under some temporary pressure, but the risks are still for some more USD gains heading into the end of the quarter, in my view.

 

* Information and Forschung / Germany’s Institute for Economic Research

Central banks provide surprises with rate cuts and on-hold decisions; will there be any surprising decisions this week in the emerging markets?

Last week’s central bank meetings saw the surprise from the SNB (Swiss National Bank), that chose not to raise interest rates when the markets had overwhelmingly expected a 25 basis-point hike. That pushed EURCHF to a 2-month high, albeit SNB President, Thomas Jordan, warned that the central bank could still hike further. Meanwhile the other central banks didn’t deviate from market expectations, but there were some suggestions that the end is near for monetary tightening in more and more countries.

This week sees the likes of the Hungarian, Thailand, Mexican and Colombian central banks decide on interest rates. While it could be a dull affair from the latter two meetings, the first two could see divergence, with Hungary set to cut the headline rate by a full percentage point, but the Bank of Thailand set to raise interest rates 25 basis points. Could there be currency weakness in Hungary and outperformance in Thailand? Perhaps, but markets need to think more holistically about what this might mean for later into 2024. Some of the economies that are already cutting interest rates could have a sizeable head start on their economic rebounds versus those that are dragging their feet which, in my view, would offering medium term FX strength to the trailblazers on rate cuts.

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