#Forex Friday:#GBP,#USD & #ComDolls (18 NOVEMBER 2022)
Welcome to Forex Friday, a weekly report in which we discuss selected currency themes mainly from a macro viewpoint, but we also throw in a pinch of technical analysis here and there.
In this week’s edition, we discuss the dollar, pound and commodity dollars and look forward to the week ahead.
US dollar still struggles to shake off CPI surprise
On Friday morning we saw the European stock markets rise without any major catalysts. As risk appetite improved, the likes of the GBP/USD, AUD/USD and NZD/USD all rose a tad, along with Bitcoin, although they all later came off their earlier highs. The moves were driven by slight weakness for the dollar, still unable to find its feet again after that big inflation miss from the week before. Although the dollar has huffed and puffed amid continued hawkish commentary from several Fed officials, it is yet to come back in a meaningful way yet. But with China and several European economies all struggling for growth, with the latter hurt by soaring inflation and an energy crunch, I reckon that at best we will only see modest further upside for the likes of the GBP/USD and EUR/USD, while the USD/CNH has already bounced back noticeably earlier this week, before falling back in this first half of Friday’s session.
Among the Fed officials who have spoken, their message has all been similar – i.e., that their fight against inflation continues and more rate increases are on the way. St. Louis Fed President James Bullard on Thursday said interest rates need to rise further to a 5%-7% range. A day earlier, San Francisco Fed President Mary Daly said a pause in rate hikes was “off the table.” As a result, the market’s pricing of terminal interest rates has gone back to 5% for May through July 2023.
Commodity dollars at risk as copper and oil drop
Although the likes of AUD and CAD have been able to hold their own relatively well against USD, do watch out for a correction in commodity currencies with oil and copper falling sharply on Chinese demand concerns this week. On the one hand, AUD/USD and CAD/USD have been supported because of investors trying to price out the risks of further sharp rate increases in the US and lean towards the possibility of the Fed tilting to a more dovish stance amid expectations that inflation has peaked. On the other hand, they will be keen not to take excessive risk after last week’s big up move and in light of fresh concerns over China, something which weighed heavily on some commodities this week.
Cable faces stiff resistance
Although the GBP/USD rose along with all the other majors, there’s a limit to how much further it can go up from here. Granted, we saw some slight improvement in UK data, with retail sales topping estimates with a gain of 0.6% month-over-month and jobless claims beating expectations earlier in the week, along with wages. However, the big worry is the still-rising inflation, which remains in double digits. Usually, rising inflation tends to provide support for currencies as central banks normally hike rates to bring inflation back under control. Although that is also the case with the Bank of England, it is just that the economy is so bad right now that further sharp rate increases might do more damage than going at a steadier pace. We learned this week that annual inflation surged to a new multi-decade high of 11.1% from 10.1% previously. Consumer spending is thus likely to remain subdued with prices of everything rising while real wages continue to fall. Many economists believe the UK is heading into a prolonged recession. With UK Chancellor Jeremy Hunt announcing £55 billion worth of tax rises and spending cuts, Britons face more pain for months, or even years, to come. Although some of these risks are priced in, this does not mean the cable is out of the woods yet. In fact, I am on the look out for a fresh reversal sign to emerge to suggest rates have topped out. Perhaps 1.20ish is going to be a tough nut to crack.
Coming up in the week ahead
RBNZ Interest Rate Decision (Wednesday, November 23)
Since starting the rate hiking cycle, the Reserve Bank of New Zealand has lifted interest rates from 0.1% to a high so far of 3.5% due to soaring inflationary pressures. The RBNZ has been hiking rates by 50 basis points at each of its meetings this year. Inflation has consistently surprised, and we wouldn’t rule out the possibility of an outsized 75 basis point hike at this meeting.
European Flash PMIs (Wednesday, November 23)
Soaring inflation has weighed heavily on consumers’ disposable incomes and, as a result, many analysts expect much of Europe to fall into a recession. European PMIs have been trending lower and have fallen below the boom/bust level of 50 already. Any further weakness will exacerbate those worries and could hurt risk assets.
FOMC Meeting Minutes (Wednesday, November 23)
The last FOMC meeting was held before the much-weaker-than-expected October inflation report was published. That CPI report led to a big sell-off in the US dollar and caused stocks, bonds and gold to rise sharply. Some Fed officials have already revised their views on inflation and pace of interest rate hikes. So, the market impact of the FOMC minutes might be more subdued than usual.
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