Sterling quiet as USD looks ahead to key data releases
On Monday, the Pound Sterling (GBP) displayed a decrease in value against both the Euro (EUR) and the US Dollar (USD), as UK markets remained quiet due to the UK Bank Holiday.
Reviewing the past week, there was volatile trading for the GBP following comments made by Fed Chair Powell on Friday.
After a brief upsurge to 1.2650, the exchange rate of Pound to Dollar (GBP/USD) experienced a sharp decline to reach a new 2-month low at 1.2550, driven by concerns about elevated US interest rates. It later stabilized around 1.2575.
Risk appetite exhibited a tentative recovery on Monday, although UK markets were closed for the holiday.
Over the weekend, China introduced significant measures to bolster its domestic capital markets.
Beijing disclosed a 50% reduction in stamp duty on equity purchases and outlined restrictions on new listings.
Although no major fiscal announcements were made, Chinese stocks surged, and the Chinese yuan made substantial gains, thereby dampening broader demand for the dollar.
Given this backdrop, GBP/USD reclaimed ground just above 1.2600 during early European trading.
However, the exchange rate between Pound and Euro (GBP/EUR) encountered difficulty in making progress and settled near 10-day lows, slightly above 1.1650 on Monday.
According to data released by the CFTC, Commitments of Traders (COT) data indicated a net increase in long, non-commercial Sterling positions, reaching slightly above 59,000 in the latest week, up from 51,000 previously.
This marked the second-highest long position in 15 years, maintaining the potential for Pound selling if confidence in the UK were to deteriorate.
In remarks over the weekend, Bank of England Deputy Governor Broadbent expressed concerns about sustained upward pressure on wages.
He additionally mentioned that monetary policy might need to remain restrictive for a considerable duration. He stated, "There's a possibility that we might have taken insufficient measures and might need to take more. But there's also a risk that we might have already taken excessive measures."
Despite the anticipation that interest rates will be raised by an additional 25 basis points to 5.50%, expectations for the peak rate have gradually declined, now slightly below 5.75%.
Further worries that the restrictive monetary policy could undermine the UK economy continued to impede the strength of the Sterling.
EUR
During the week, the Euro's exchange rate encountered heightened strain, primarily stemming from increased apprehensions regarding the Euro-Zone's future prospects due to weak business confidence data.
The EUR/USD pair dipped to levels not seen in 2 months, falling below 1.0770 before exhibiting a very cautious recovery.
The balance of US monetary policy remains delicate, and a resurgence in confidence within the Euro-Zone economy will likely be necessary to initiate renewed gains for EUR/USD.
Should the prevailing sentiment continue to lean towards caution, EUR/USD remains susceptible.
Bank of America holds the expectation that EUR/USD will be trading at 1.05 by the end of the year.
The Euro-Zone's manufacturing index experienced a slight recovery, rising to 43.7 from 42.7, surpassing the projected value of 42.6. Conversely, the services-sector index plummeted significantly to a 30-month low of 48.3 for the month, down from 50.9 and below the consensus forecast of 50.5.
The month saw a resurgence in upward pressure on input prices, driven by escalating energy costs.
While manufacturing output prices remained restrained, charges within the services sector increased at the slowest pace since October 2021. However, there was continued robust upward pressure on wages.
These data points have heightened concerns about the looming possibility of a recession within the Euro-Zone.
USD
Central bankers' remarks at the Jackson Hole symposium conveyed a continued emphasis on inflation by both the Federal Reserve and ECB.
However, these comments also underscored the significance of upcoming data releases in shaping expectations surrounding monetary policy.
Thus, the forthcoming week will place substantial attention on US labor market data, a critical barometer for gauging whether labor conditions have cooled sufficiently to alleviate the need for further interest rate hikes.
Should the US data reveal weakness beyond expectations, this could generate heightened optimism that interest rates have reached their peak. Conversely, if the data surpasses expectations, concerns over underlying trends persist, possibly necessitating further interest rate hikes.
It's important to exercise caution, as labor market data tends to be a trailing indicator. Consequently, even if job figures remain robust, underlying economic conditions could be deteriorating significantly.
Fed Chair Powell's comments on Friday conveyed the central bank's readiness to raise rates as needed to curb inflation. Powell additionally indicated the intention to maintain rates at a constraining level until there's confidence that inflation is sustainably moving towards the 2% target.
While Powell acknowledged the existence of risks on both sides of monetary policy and acknowledged progress, the overall tone remained relatively hawkish.
Market sentiment still holds that rates won't be raised in the September meeting, but the likelihood of a move in November remains above 50%.
After Powell's remarks, there was volatile trading for the dollar, ultimately presenting a firm overall demeanor.
China's efforts to bolster equity markets provided support on Monday, leading to a retreat in the dollar index from its 12-week highs.
According to Danske Bank, China's actions, while anticipated, possessed a broader scope than expected, leading to over 2% gains in Chinese equities during overnight trading. The durability of these gains hinges on China's subsequent policy steps aimed at economic upliftment and risk reduction.
Should China fail to generate positive momentum, the dollar is poised to regain its footing.
Data for the week ahead
Monday
01.30 AUD Retail Sales
Tuesday
07.40 AUD RBA Bullock's Speech
14.00 USD Consumer Confidence
Wednesday
01.30 AUD Monthly Consumer Price Index
09.00 EUR Eurozone Business Climate
12.00 EUR German Consumer Price Index
12.00 EUR German Harmonized Index of Consumer Prices
Thursday
01.00 CNY NBS Manufacturing PMI
01.00 CNY Non-Manufacturing PMI
06.00 EUR German Retail Sales
09.00 EUR Core Harmonized Index of Consumer Prices
09.00 EUR Unemployment Rate
12.30 USD Core Personal Consumption Expenditures - Price Index
Friday
01.45 CNY Caixin Manufacturing PMI
06.30 CHF Consumer Price Index
12.30 USD Average Hourly Earnings
12.30 USD Nonfarm Payrolls
12.30 CAD Gross Domestic Product Annualized
14.00 USD ISM Manufacturing PMI
.png)