Neil Parker, our FX Markets Strategist shares his views on the currency markets this week
United Kingdom: GBP/USD under pressure ahead of a heavy data week
Sterling ended last week slightly lower against the USD, but higher against the EUR. Bank of England (BoE) Governor Bailey’s earlier message that he was among the officials who believe the minimum criteria for tighter monetary policy have been met, might have lent some support to Sterling. Last week’s July GDP (Gross Domestic Product) data was slightly soft, which might be due to a sluggish services sector amid a resurgence of Covid cases in early summer. However, self-isolation restrictions have been eased. This should provide further support to the economic recovery. A weak single monthly print is neither here nor there, but whether the weak monthly GDP print is a signal of an underlying loss of momentum could impact the central bank monetary policy outlook and thus Sterling.
This week will be a major week for UK economic data releases with inflation, labour market and retail sales, which could give a broader picture on the economic recovery after the UK reopens the economy. Solid economic data could increase market expectations for a more hawkish monetary policy outlook in the BoE meeting next week and play positive for Sterling, in my view.
United States: USD starts the week on front foot, CPI eyed
The USD is extending last week’s gains as the risk of a slower global recovery due to the pandemic weighed on the market sentiment. FOMC (Federal Open Market Committee) speakers sounded a more cautious tone after the weak employment report last week. Fed’s Williams suggested this week that it might be appropriate to start tapering this year, but the hurdle from a labour market perspective hasn’t been met yet. The cautious tone wasn’t entirely surprising for market investors after the recent weak employment report, thus it failed to provide much support to more risk-oriented assets. Given that the speech clearly implied that there are still some more gains that are needed in employment, the next jobs number is becoming even more important for the Fed’s timeline of reducing asset purchases, in my view. The dollar is likely to close the week higher against most of its G10 peers.
This week will be a quiet one from Fed side, as we enter the blackout period before the FOMC meeting. However, there will be some key data releases on the consumer side such as the CPI (Consumer Price Index) print and retail sales. The inflation data might not be as important as the next employment report, but another CPI print could give market investors a chance to bring back the transitory-or-not debate, as we wait for next week’s FOMC meeting.
Europe: EUR/USD lower, CPI in focus
EUR/USD extended last week’s loss and fell below 1.18 this week, as the dollar gained. The European Central Bank (ECB) policy meeting last week had a somewhat underwhelming feel given the tone of recent speeches. The policy makers announced a small reduction in their pace of asset purchases in Q4 and have revised up their growth and inflation projections. However, the upward economic revisions were less than what the earlier central bankers’ hawkish messages would have implied, which might have also weighed on the EUR. Importantly, the 2023 inflation projection was raised by only one tenth, to 1.5% – still remaining well below the inflation target of the bank. It seems that a lot more monetary support is needed in the coming years to push that number higher.
This week will see August inflation data, which could provider further insight on the region’s inflation outlook and economic recovery.
Central bank: Quiet week with a lack of central bank activities
This week we get a bit of a lull regarding central bank activity, before it picks up again next week with the Fed and the Bank of England.
The Reserve Bank of Australia (RBA) left policy rates unchanged this week and tried to keep a balance between reducing asset purchases and maintaining support for the economy. The RBA went ahead with a dovish taper by reducing the amount of bond-buying as planned, but extending its purchases until at least mid-February 2022 (from mid-Nov in the previous statement). The Bank of Canada (BoC) meeting came and went with little fanfare. However, the central bank’s tone on the country’s economy in their post-decision press briefing sounds optimistic, and whether there will be another round of BoC tapering (i.e. cutting asset purchase) in the upcoming October policy meeting will need to be watched. The Central Bank of Russia (CBR) hiked rates by 0.25%, lower than economists’ expectations in a Bloomberg survey. However, the CBR signalled that rake hikes are possible at one of their next meetings, and thus will be an area to watch. Similarly, the Central Bank of Peru (BCRP) also raised their policy this week, but by 0.5%. Their statement leaned to the dovish side as it pointed out that further hikes are not set in stone. It seems that policy makers are trying to calm the markets, but whether hikes will continue will need to be watched. Lagging their emerging market peers, the Central Bank of Malaysia (BNM) and National Bank of Poland (NBP) both kept their policy framework unchanged this week.
View last week’s FX Quick take
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