UK: Weekly FX Market Update 15 August

GBP

• Last week, the pound had a mixed performance as it gained approximately 1% against the dollar, but slipped 0.3% against the euro and fell 2% against the AUD.

• UK GDP was released on Friday, and although the data wasn’t as bad as feared, it still points to a contraction in the UK economy in Q2 2023.

• The pound has multiple risk events this week with average earnings on Tuesday, CPI on Wednesday, and retail sales on Friday.

• Could this week’s inflation and wage data force the Bank to turn even more hawkish and strengthen the pound?

This Tuesday’s release of average earnings is expected to show a 5.1% quarterly rise, lower than the July gain of 6.2%. The market and the Bank of England will be watching this closely, as a stronger than expected number will imply a possible wage price spiral which could force the Bank to increase the pace of its current rate hikes. CPI on Wednesday is expected to show a gain in inflation of 9.9% on an annual basis and higher than last month’s 9.4% reading. The release will be compared with the latest comments from the Bank that inflation will hit an eye-watering 13% before peaking. Finally, Friday’s retail sales release will be inspected as a clue to how the UK shopper is coping with high inflation levels. Last month’s retail sales release showed a 0.1% drop.

Even though the USD was weaker across the board following the weaker than expected US CPI print, it’s worth noting that GBP/USD was unable to break resistance levels, unlike EUR/USD and the commodity currencies.

EUR

• The single currency took advantage of the weaker than expected US CPI release and traded above its August high at 1.0294.

• Europe is traditionally on holiday in August and liquidity is not as deep as usual. In this case, it could be that moves are exaggerated this month.

• Thursday sees the release of Eurozone Final CPI, which is expected to remain at 8.9% on a yearly basis.

• It could be that EUR/USD is moved by other currency themes, such as Wednesday evenings release of US Federal Open Market Committee (FOMC) meeting minutes.

On a technical basis, now that price has traded above the August 2nd high, it is possible for price to move higher and target resistance at 1.0450. However, we do note that the fundamental backdrop for the euro includes a looming energy crisis, a central bank that is the slowest amongst the US Federal Reserve, Bank of England and itself in hiking interest rates, and an economy that Goldman Sachs suspects is already in recession. Could these factors limit the spike on EUR/USD?

USD

• The Federal Reserve at its last meeting said that it was moving to a data-dependent stance and would drop its forward guidance.

• Since then, the US economy has posted a strong jobs report showing 528k new jobs added in July.

• US CPI was not as strong as expected, with headline inflation falling to 8.5% and lower than the 8.7% expected and 9.1% posted in July.

• US Federal Open Market Committee (FOMC) meeting minutes are released on Wednesday.

The drop in US CPI caught the markets off guard with the USD declining across the board. Following this, San Francisco Fed President Daly said that a 0.5% rate hike is the Fed’s base case for September, although they were open to a 0.75% rate hike. Currently, a 0.75% rate hike isn’t ‘priced in’ so could be cause for future USD strength.

RoW

• Interestingly, 72 hours after the US CPI print, the AUD had manged to gain 2.5% against the USD, whilst the euro and pound had only gained 1% and 0.7% respectively.

• Could it be that with China starting to recover from COVID, and relations between the Chinese and Aussies possibly thawing, that the AUD can continue its recent positive performance against its currency peers?