Daily FX Bites 26th July 2023

Welcome to our daily morning FX Bites email. A 30 second snap shot of the key economic releases and risk events that lie ahead from across the global. We have kept it concise and clear; however containing all the information you need to ensure you are up –to-date with the latest market moving events in the world of foreign exchange – from economic data releases to the latest central bank speakers.

 

What’s Going On?

On Monday we saw a slew of global PMI’s released out of Asia, Europe, the UK and the US for July – giving us the most up-to-date activity data on the global economy. The PMI economic  monthly data releases give us a  very good insight into the health of the global economies, in both the services and manufacturing sectors – above the 50 level for a PMI release means that the economy is doing well and expanding, below 50 and things are not looking that good. For the UK, the US and Europe yesterday, we did not get one PMI, neither in Services or Manufacturing above the 50 level for July……..!!. Relatively speaking the PMI’s in the US were stronger than the UK and Europe, with Europe printing the weakest amongst its peers. Hence we have seen EUR/USD trade below major support at 1.11/1.1090 yesterday and GBP/USD sell off however to a lesser extent.

Yesterday morning we have had German IFO Business Confidence Index released – coming in at 87.3 versus market expectations of 88.0. Again this has helped compound the PMI figures out of Europe on Monday and has seen further selling pressure in the Euro.

In contrast to this we had Consumer Confidence out of the US yesterday afternoon – market expectations had this release at 112.00, however it came out at a massive 117.00 – once again highlighting the recent dichotomy between Europe and the US.

At ‘’ V High’’ on the importance scale we have – The Federal Reserve Interest Rate Decision at 7.00pm London time – Our base case however is that the Fed will hike by 0.25% to 5.50% and maintain its tightening bias at the July meeting. Chair Powell is likely to suggest that a follow-up hike is possible at the next meeting in September, but will emphasize that no decision has yet been made, and will depend on the substantial inflation and jobs data in the interim period.  The market impact of this messaging is likely to be modestly hawkish.

 

Chart of the Day 

EUR/USD has sold off its highs from Monday of last week, which saw it trade above 1.1250 level – red line on chart. We have subsequently seen a slight reversal in the Dollar’s fortunes, as it has strengthened across the board. This has been further compounded versus the Euro on the back of much weaker PMI’s out of Europe on Monday, a weak IFO number of out Germany yesterday and a technical break of major support at 1.11/1.1090 – see green line on chart.

Welcome to our daily morning FX Bites email. A 30 second snap shot of the key economic releases and risk events that lie ahead from across the global markets. We have kept it concise and clear; however containing all the information you need to ensure you are up –to-date with the latest market moving events in the world of foreign exchange – from economic data releases to the latest central bank speakers.

 

Today’s Highlights – A quiet session overnight in Asia, with little movement in the currency space. The Australian Dollar is the only outlier, rallying back above 0.68 versus the Dollar on the back of a much stronger Jobs Report out overnight – Employment Change came in at 32.6k in June, versus market expectations of 15k and the unemployment rate come in at 3.5% versus 3.6% expected in Australia.

We have no economic releases of significance out of Europe or the UK today.

At ‘’ High’’ on the importance scale we have – Existing Home Sales (low impact but is still an important figure to watch) and Initial Jobless Claims out of the US later this afternoon. Housing Starts came in slightly weaker than expected yesterday, adding to the mounting worries over a ‘’softer landing’’ in the US. Existing Home Sales will be closely watched this afternoon to see if this trend continues. Jobless Claims in the US have had significant market impact over the past number of weeks, as the market worries about a softening labour market – helping to compound this recent sell off in the Dollar- again this will be keenly watched this afternoon.

 

Chart of the Day – GBP/USD has rallied significantly over the course of June and July – over 6% since the beginning of June – see chart below. We topped out just above 1.3140 late last week and we have subsequently seen a 2% sell off. The market is still very much in a sell Dollars mode and will look to add to Dollar shorts on any rallies in the greenback. In saying that GBP/USD needs to close the week back above 1.30 – green line on chart – if we are to see further topside momentum in the Pound versus the Dollar.

The US Dollar – An Insight – Bigger Picture

The Dollar – Versus the Euro

It’s a 6 minute read –

 

Understanding our clients exposure to EUR/USD annually, we have put together the below research piece for your interest. Below we outline how we see EUR/USD trading over the course of 2023 – giving our clients our 3, 6 and 9 month EUR/USD trading forecasts. This will hopefully be helpful over the next few weeks/months as you hedge your EUR/USD exposure.

This is intended to give you a good overview, macro picture – we can obviously help you on a more micro level when you actually need to hedge.

 

With this as our backdrop we will take a look at the following;

 

1. Firstly, we will examine how the Dollar has traded over the previous 12 months.

2. We will then look at the principle drivers of this Dollar trend over the course of the past 12 months and more importantly what we feel will be the pertinent drivers going forward for EUR/USD over the next 9 months.

3. Finally we will examine where we see the highest probability of EUR/USD trading on a 3, 6 and 9 month time horizon – bringing us up to year end.

The Dollar’s Performance over the past 12 months
Let us take a bird’s eye view of the recent Dollar trend, dating back to the beginning of 2022. Below is a chart of the DXY Index – the DXY Index represents the strength of the Dollar at any one time versus a basket of major global currencies. EUR/USD makes up over 50% of this basket. As we can see from the chart below – the Dollar Index (DXY) rallied over 21% over the course of 2022 to its peak towards the end of Sept 2022– this was known as the Dollar’s ‘’exceptionalism’’ phase in the financial markets. We have subsequently seen a 12% decline in the Dollar from its peak in Sept, down to its lows at the beginning of Feb this year.
Chart – DXY – The Dollar Index’s performance from 2022 – to present. Volatility is certainly back in the currency markets and a robust hedging strategy is paying dividends.

Chart – EUR/USD – Euro’s performance from 2022 – to present. As the US Dollar rallied during this period, the EUR/USD traded lower. As we can see in the chart below we broke parity in EUR/USD (1.00) in Aug 2022, trading to a low of 0.95 in late Sept – which equated to multi decade lows in EUR/USD – levels not seen since 2002 in the currency pair – truly a one off hedging opportunity. We have subsequently rallied over 15% off those lows seen in Sept to the highs just above 1.10 at the beginning of Feb 2023.

 

So why did the Dollar rally?
We mentioned above that this period was known as Dollar ‘’exceptionalism’’ in the currency markets, during and up to Sept 2022. The driver of Dollar strength largely stemmed from the actions of the Federal Reserve (Fed). The Fed was one of the first G10 central banks that embarked on an aggressive interest rate hiking cycle to curb runaway inflation in the US. Interest rate differentials are one of the major drivers of currency strength – so hence the higher the interest rates in a G10 country, usually the stronger the currency – this yield play attracts buyers of the higher yielder. The Fed aggressively hiked interest rates during this period from 0.25% to 5.00% – see chart below

Chart – the below chart demonstrates the consistent and aggressive month on month increase of interest rates in the US from Jan 2022 to present – where interest rates moved from 0.25% to 5%.

So, if interest rate were only at 3.25% in the US in Sept 2022, why did the Dollar top out back then and begin to weaken?

Well there were a number of factors beginning to play out back in Sept 2022. Firstly other global central banks had begun their interest rate hiking cycle. The US Dollar had rallied a long way – it was trading at multi decade highs. Inflation was also showing signs of slowing down in the US and the market felt the Fed would have to ease up on its hiking cycle soon, as the first whispers of recession in the US began to emerge. So the exceptionalist shine on the Dollar began to fade and the Euro began to recover versus the greenback.

 

The Euro recovered some 15% versus the Dollar up to the beginning of Feb this year, as the ECB begin its interest rate hiking cycle and recession fears hit the States. Feb’s economic releases out of the US however once again turned everything on its head – inflation stopped falling, the economic survey and sentiment indicators all turned positive and Feb’s employment report was a monster release.

 

Recession, what recession……! We pivoted from the Fed potentially cutting interest rates by year end, to interest rates now remaining higher for longer, with the financial markets pricing in fresh rate hikes. The macroeconomic picture completely flipped in Feb and remained positive until…… the SVB crisis and what could still turn into a full regional bank crisis in America.

 

It is incredibly unusual for these bigger picture macro views to flip flop within a matter of days, however these black swan events create such market volatility and turmoil– longer term views are forced to pivot.

 

Post the SVB crisis and subsequent Credit Suisse collapse we have quite quickly found ourselves back to Jan 2023 environment with regards to currencies – and that is the potential for a lower Dollar on the back of the Fed having to dramatically slow it’s interest rate hiking cycle – we currently have only one more 0.25% hike priced into the yield curve in the US, with a 0.25% cut in interest rates by the Fed priced in by year end.

 

Given how currencies have behaved throughout 2022 – we feel this will be the principle driver for the Dollar over the next 9 months.

 

So with US interest rates looking like they will top out next month in the US – leaving the terminal rate at 5.25%, a potential further escalation of the regional banking crisis – A member of the Federal Reserve Committee – Neel Kashkari –was quoted over the weekend – “Not all of these stresses are behind us. I expect this process will take some time…..Sometimes it takes longer for all the stresses to work their way out of the system … we know that there are other banks that have some exposure.” – We feel there is a higher probability is for a lower Dollar over the course of the next 3, 6 and 9 months.

 

Where to in 3, 6 and 9 months’ time?

3 Month Horizon – a break and weekly close above the yearly highs at 1.1033 is the first step that is needed. A break of this level should attract further buyers to the market and our target for the 3 month horizon for EUR/USD is 1.1200 – into the major pivot zone dating back to 2019, as shown on the chart below with the green line.

6 Month Horizon – The 1.1200 maybe a tough nut to crack however over the 6-month horizon we ultimately feel EUR/USD should rally through this resistance/pivot point and extend its move up to 1.1500 – where again we come up against major resistance – see chart below – red line represents further topside resistance.

9 Month Horizon – a clean break of the 1.15 level in EUR/USD should allow us to finish the year in the 1.1800-1.2000 zone. A slightly wider target here, however it is 9 months out.
Major risk events on the horizon

Major risk events on the horizon which may derail these forecasts – worth keeping on the radar.

 

1. Further contagion in the US from the SVB crisis to other regional banks

 

2. April’s employment figures out of the US – 7th April.

 

3. April’s Inflation figure out of the US – 12th April

 

4. Federal Reserve Interest Rate decision – 3rd May

 

5. ECB interest rate decision – 4th May

 

Treasury First is powered by Assure Hedge (UK) Limited, a company incorporated in England and Wales (No.10723112) with its registered office at 45 Eagle Street, London WC1R 4FS, UK, is authorised and regulated by the Financial Conduct Authority of the UK (FRN:783837). Assure Hedge Limited, the parent company, is incorporated in Ireland (No. 578153) with its registered office at Dogpatch Labs, CHQ Building, North Wall Quay, Dublin 1, Ireland.

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Sterling – Oops…..Looks like Bailey did it again…….

                                      

Sterling – Versus the Euro

 

In our report last week, we spoke about potential green shoots in the UK economy –as a number of positive economic data points compounded some sanguine developments with the Northern Ireland Protocol. All of the above had allowed the Sterling to appreciate, particularly versus the Euro over the course of last week and into the start of this week, taking us below the 0.8800-0.8790 zone in EUR/GBP or above the 1.1400 level in GBP/EUR terms – for the first time since mid-January.

 

With a large portion of the market still very bearish on the UK, we went into this with high hopes that improving economic sentiment may begin to change minds. This week’s key risk event was a speech by the Governor of the Bank of England, Andrew Bailey and unfortunately, he did not read the new wave of optimism. In fairness he did not deviate massively from his speech following the interest rate decision by the Bank of England in Feb – however, he failed to fuel any of the newfound optimism the market was feeling from last week and firmly halted any further appreciation of the Pound versus the Euro or the Dollar –

 

Weekly Chart of EUR/GBP – Trending nicely lower until Bailey’s Speech on Wednesday –

 In GBP/EUR terms – trending nicely higher – until the Central Banker dampen the parade

So what did he say?

As we mentioned above, it was not wholly his fault – he very much towed the party line from the interest rate meeting in early Feb – the issue here is the markets have moved on and during the month of Feb, we had seen a significant repricing of global interest rates – ie the market is now looking for interest to rise more than they had expected in Jan of this year. So it was Bailey’s comments or lack of future interest rate hikes that caught the market wrong-footed. UK bonds were looking for a more hawkish tone from the Governor and when he did not deliver they began to price out interest rate hikes and we saw a subsequent sell-off in the Pound. The issue here is the market is certainly not in the same place as it was pre-Feb’s MPR, given the impressive re-pricing we have seen throughout Feb.

So we are back down at the bottom of the recent range in Sterling versus Euro and all last week’s hard work is undone. We now have to wait and see what March brings and whether we can keep the momentum up in the recent positive set of UK data.

 

Treasury First does not guarantee the accuracy or reliability of the information in this message, and any views expressed are not necessarily the views of the company.

Treasury First is powered by Assure Hedge (UK) Limited, a company incorporated in England and Wales (No.10723112) with its registered office at 45 Eagle Street, London WC1R 4FS, UK, is authorised and regulated by the Financial Conduct Authority of the UK (FRN:783837). Assure Hedge Limited, the parent company, is incorporated in Ireland (No. 578153) with its registered office at Dogpatch Labs, CHQ Building, North Wall Quay, Dublin 1, Ireland.

EUR/GBP, GBP/EUR or ‘’The Cross’’ as it is known amongst currency traders –

EUR/GBP or GBP/EUR, as many of our clients like it quoted as, is a heavily traded currency pair, opening up trade between the EU and the UK. Vast volumes go through this currency pair on a daily basis in the FX markets, with many industries and their profits hugely sensitive to fluctuations in this exchange rate.

In this week’s currency report from Treasury First, we look at the performance of EUR/GBP over the course of 2022 and hopefully garner some insights into its future path into year end and beyond into 2023 – we feel the 0.8600 level in EUR/GBP holds the key here.

We started 2022 with GBP/EUR trading at the lofty heights of 1.20 level – making exporters of goods into Britain from the EU very competitive indeed – we had not been at these levels since 2016 – pre Brexit vote.

This trade began to lose momentum post the Ukraine invasion by Russia and the old ‘’risk off’’ dynamics of the financial markets kicked in. GBP/EUR began to head south as we can see from the chart below.

 

GBP/EUR – begins to lose topside momentum in March 2022, moving off the 1.20 level – red line on chart and heads south, as financial markets trade in ‘’risk off’’ mode following the Ukrainian invasion. By the end of the summer focus has now firmly shifted to the UK itself and the weakening economic backdrop – see circle highlighted on the chart – showing GBP/EUR dipped below 1.08  – from the 1.20 level at the beginning of the year – falling over  10%

 

EUR/GBP –

In EUR/GBP terms the 0.8600 level has been pivotal over the course of 2022, as the currency pair has oscillated around this zone. As can be seen from the chart below – the red line has defined us for this year’s trading – spending the majority of the year below 0.8600 – Euro weakness and Sterling strength – until finally the focused shifted the UK economic fundamentals in late Aug. From Aug onwards we have spent the majority of our time above the 0.8600 – classic case of old resistance, now acting as new support for the currency-

The longer we remain above this red line – 0.8600 in EUR/GBP terms and 1.1628 in GBP/EUR terms, the higher the probability that renowned topside momentum enters the market and takes us higher in Euro versus Sterling in the coming months.

 

So what should we be looking out for into year end and beyond?

Firm weekly closes in the currency pair above 0.8600 would indicate to us that the path of least resistance is higher and that we could see a significant break of the range that defined us in 2022 and a move in the 0.9000 zone or 1.11 in GBP/EUR terms.

However a weekly close below 0.8600 and weekly close below the 200 day moving average – yellow line in chart below –which we have not been below since Aug 2022 – would be a very bearish signal and should indicate a move back towards 0.83-0.82 zone or the 1.20 level in GBP/EUR terms.

 

EUR/GBP – the two bearish indicators to watch – a weekly close below both the 0.8600 level and the 200 day moving average would indicate a move back to the 0.8300-0.8200 zone or 1.2000 level in GBP/EUR terms.

Sterling – Still causing pain – in both directions

Sterling’s wild swings in the currency markets are causing all kinds of pain for those exposed – on the way down and on the way back up again in recent weeks. This is when a robust hedging strategy comes into its own and can help smoothen out these extremely volatile periods.

Sterling’s volatile swings over the past 3 weeks – both down and back up again.

Let’s take a step back –

Sterling is grabbing all the headlines of late and rightly so, as the idiosyncratic stories dominating UK politics are leading to outsized moves in UK asset classes – particularly FX. Although domestic issues are having their impact, Sterling is still being pushed and pulled around by the broader market dynamics – giving its moves added venom. This week’s price action in the currency markets has been an excellent example of this. We are ultimately (the wider G10 currencies) – being dragged around by risk on/risk off market dynamics.

Risk on – this environment is dominated by rallying equity markets, lower levels in the Dollar, higher commodities and bonds selling off

Risk off – this environment is dominated by weak equity markets, a higher Dollar, lower commodities and a rallying bond market

This week opened up on a positive note – risk on, which saw the Dollar sell-off across the board. This was hugely exaggerated when it comes to Sterling, which rally some 3.6% from Monday to Wednesday morning. Clearly, some of the GBP/USD strength was due to positive domestics developments – the U-turn on higher tax cuts from the Chancellor, however, it was also due to the weakness in the Dollar, as can be seen with the Euro, which rallied nearly 5 big figures versus the Dollar to trade just shy of parity, yesterday evening – see chart below –

Euro’s performance since last Thursday versus the Dollar – rallying nearly 4% off the lows, just shy of the parity mark.

Unfortunately, this volatile period looks set to stay for the immediate future. There is very little on the immediate horizon to give us clarity over the global inflation problem, the global energy crisis and onset of winter in the northern hemisphere, the Ukrainian war and geo-political tensions and of course the threat of a potential global recession, in the midst of global interest rate hiking cycle. What we can do is observe some important levels in the major currency pairs, a break of which should give us further insight into future, more medium-term directions.

EUR/USD Levels – to watch

Topside – 1.00 and 1.02

Downside – 0.9530

GBP/USD Levels – to watch

Topside – 1.1500 and 1.1750

Downside – 1.10 and 1.0350

EUR/GBP Levels – to watch

Topside – 0.9065 and 0.9266

Downside – 0.8650 and 0.8600

 

We can of course also look ahead to any major risk events ensuring we are fully aware of their potential impact on the markets.

This week we have employment figures out of the US on Friday and their inflation print next week on Thursday the 13th. These are the two most important figures out of the US in October and should be closely monitored for their impact on the FX markets.

An Aside –

Worth mentioning the dreaded word – Brexit here – on a positive note for once – there are a few positive noises circulating with regards to the creation of the EPC (European Political Community) of which the UK is to be a member. Liz Truss even attended its inaugural meeting this week which could pave the way for a more cohesive approach down the road….. Fingers crossed.

 

Treasury First does not guarantee the accuracy or reliability of the information in this message, and any views expressed are not necessarily the views of the company.

Treasury First is powered by Assure Hedge (UK) Limited, a company incorporated in England and Wales (No.10723112) with its registered office at 45 Eagle Street, London WC1R 4FS, UK, is authorised and regulated by the Financial Conduct Authority of the UK (FRN:783837). Assure Hedge Limited, the parent company, is incorporated in Ireland (No. 578153) with its registered office at Dogpatch Labs, CHQ Building, North Wall Quay, Dublin 1, Ireland.

We highlighted last week in our ‘’Central Bank Showdown’’ report that this week could be extremely volatile for the foreign exchange markets. With no less than 9 major central bank interest rate decisions on the cards spread over Wednesday and Thursday, the likelihood of some wild moves was very high. The risk events did not disappoint and FX markets have experienced unprecedented volatility this week.

The movers and shakers have been JPY, GBP and Euro – in that order. The JPY appreciated versus the Dollar, with Sterling and the Euro depreciating further. Sterling is clearly winning the ugly contest hands down…..

Japanese Yen – Intervention

The Ministry of Finance in Japan conducted an unprecedented Forex intervention into its currency on Thursday of this week. This was the first time the Govt have intervened to protect its currency since 1998. The USD has appreciated versus the JPY by over  28% this year alone – forcing the Japanese Government to intervene in the currency markets and sell Dollars in an effort to strengthen their currency – see chart below

USD/JPY’s price action on Thursday when the Japanese Govt intervene in the currency markets – 

Sterling – Zero Friends

 

The 50 bps interest rate hike from the Bank of England this week, taking interest rates in the UK to 2.25%, did little to assist the currency. The market is now pricing in interest rates to peak in the UK at 5.25% in June of next year. UK financial assets are trading in a manner akin to an emerging market – the currency is selling off – down nearly 20% alone this year versus the Dollar, UK bonds are selling off and the UK stock markets are also selling off.  This morning the UK Chancellor provided details to parliament on the emergency fiscal measure to be introduced over the coming weeks – this mini-budget will add a further £161 billion to the deficit over 10 years. It may be an underestimate to suggest the market has not reacted well to this announcement, with Sterling selling off quite dramatically versus both the Dollar and Euro – please see the charts below.

 

GBP/USD – trading at levels not seen since 1985

EUR/GBP – firmly breaking higher out of its yearly range

Treasury First does not guarantee the accuracy or reliability of the information in this message, and any views expressed are not necessarily the views of the company.

Treasury First is powered by Assure Hedge (UK) Limited, a company incorporated in England and Wales (No.10723112) with its registered office at 45 Eagle Street, London WC1R 4FS, UK, is authorised and regulated by the Financial Conduct Authority of the UK (FRN:783837). Assure Hedge Limited, the parent company, is incorporated in Ireland (No. 578153) with its registered office at Dogpatch Labs, CHQ Building, North Wall Quay, Dublin 1, Ireland.

GBP/USD

We slipped below the 1.20 level in Cable at the beginning of July and have traded the majority of the month below this level – pls see chart. As you can see from the chart below the market has found it very hard to trade back above this 1.2090-1.2100 level, which has become decent resistance on the topside. The faith of the Sterling has been in the hands of the Dollar for most of this year, as the Dollar rallied against all G10 currencies. Of late we have had a number of positive economic signs out of the UK – for example, the PMI releases last Friday, which were markedly better than those out of the US and Europe – this has helped the Sterling moderately, however, its real faith will boil down to the Federal Reserve Interest Rate Decision this evening in the US at 7.00 pm London time. The market has priced in a 75 bps increase to interest rates and a hawkish press conference at 7.30 pm to follow. Any deviation from this should give Sterling a boast and help establish it firmly above the 1.2100 level.

 

GBP/USD has been trading below the 1.20 level for the majority of July and coming up against resistance at 1.2190-1.2100 – see red

All eyes are on the Federal Reserve Interest Rate Decision.

We are seeing very quiet markets ahead of the main risk events this week, most notably the Federal Reserve’s interest rate decision meeting in the US on Wednesday 27^th July – The announcement on whether they hike interest rates by 50 or 75 bps will be made at 7.00 pm London time, with a press conference to follow from Fed Chair Powell at 7.30 pm. A hugely important interest rate decision for the global markets, as the Fed tends to set the tone for the rest of the G10 central banks to follow – we believe they will hike interest rates by 75 bps, however, we may see some concerning language from Chair Powell in the press conference afterwards, following a number of concerning economic releases out of the States over the course of July. These include jobs claims data trending higher, alongside concerning updates on hiring from Apple, Microsoft and Shopify, weak Philly Fed and then a terrible PMI print last Friday too, contributing to some respite in the uptrend in the Dollar versus all other currencies bar the Euro.

Financial markets are generally experiencing a summer lull ahead of tomorrow evening’s announcement – all bar the Euro in fact. The Euro’s woes continued on Tuesday, as other headlines hit the wires concerning gas supply from Russia to Europe – KREMLIN SAYS ‘SOME PROBLEMS’ WITH ANOTHER NORD STREAM TURBINE. This pressure on the Euro came despite the agreement earlier in the day by EU member states – EU COUNTRIES AGREE TO REDUCE GAS USE FOR NEXT WINTER. The Euro has sold off against both the Dollar and Sterling, with EUR/GBP approaching some interesting levels – see charts below.

 

EUR/GBP has sold off over 2% since last Thursday and is approaching this 0.8400 (1.1905 in GBP/EUR terms) level. A level we have not been below since the beginning of May – red line in the chart below –

 

EUR/USD struggles to gain further traction above 1.02 and has slipped below initial support at 1.0120 – (red line) – is parity calling once again…..?