September 20, 2024

“This has been a stellar week for sterling. The Bank of England statement was decidedly cautious yesterday, and markets are beginning to prepare for a more gradual pace of rate cuts. A bumper retail sales report has handed it a further boost this morning, and we’re now at a more than two-year high against the euro.”

Tim Hallinan – Trading Director

USD

The dollar is now around 0.4% lower than its pre-Fed level as the week closes out. Trading was equally as choppy yesterday, but now that the dust has settled we are heading back towards the lowest levels of the year. The main reason appears to be that Powell’s optimism that he can contain any further softening in the US economy has made markets increasingly even more convinced by the narrative of a soft landing from restrictive interest rate policy. You can see this most clearly in the equity markets, where all the major US indexes shot up yesterday but the rate sensitive tech-heavy Nasdaq and small-cap Russell 2000 outperformed, both gaining more than 2% in a single session. As usual in this sort of situation, it’s the illiquid group of NOK, SEK, and AUD that have benefitted the most, while the safe haven USD, CHF, and JPY have all softened throughout the week. The yen is one of the few currencies to have performed worse than the dollar this week, and it has not gained any support from the Bank of Japan’s continued optimism on sustained inflation and private consumption this morning as it held rates at 0.25%. There is little for traders to go on today, so the next fresh catalyst will be the PMIs on Monday.

GBP

Sterling is having a corker this week. Put together some broad dollar weakness, a cautious Bank of England decision, and now an upbeat retail sales report this morning, and you have GBP/USD above 1.33 for the first time since March 2022 and GBP/EUR at the highest level since August 2022. The Bank of England is increasingly placing itself as a hawkish outlier among the major central banks, with persistence in services inflation proving to be more pervasive than elsewhere. The MPC voted more decisively to pause than expected yesterday, by 8-1, and the statement sought to reiterate the lingering risks that price-setting behaviour may have experienced a more permanent structural change. Meanwhile, Fed Chair Powell is doing a circuit of victory laps on inflation. Retail sales were very strong this morning, at 1.0% m/m versus a 0.4% consensus, and once again the explanation in the report falls to the weather. Not all is rosy, however, and there are risks to sterling’s rise ahead of the October budget – consumer anxiety around this is behind a sharp drop in consumer confidence in September, according to the GfK index, with the end to winter fuel payments and the potential for tax rises and spending cuts.

EUR

The euro is primarily being driven by external dynamics right now, and those external dynamics have put it within touching distance of its year-to-date highs in late August. A contracting US yield advantage and a boost to global risk appetite is a very good combination for the euro, even as the eurozone headlines continue to be filled by pessimism about the German manufacturing sector. The Bundesbank itself talked yesterday of a good chance that the German economy may already be back in a technical recession this quarter. A speech by ECB President Lagarde and a consumer confidence figure this afternoon are the main events today, but Monday’s PMIs are likely to be paid some closer attention given the focus on growth.

Markets

Equities soared across the board yesterday as investors got even more excited at the potential for the US economy to stay above water despite several years of restrictive policy. The S&P 500 rose by 1.7%, the Dow 1.3%, the Nasdaq 2.5%, and the Russell 2000 2.1%. The story was the same in Europe, where the FTSE 100 jumped 0.9% and the Euro STOXX 50 surged by 2.2%.

Main Economic Events (All Times CET)

5:00am: Bank of Japan Rate Decision
8:00am: UK Retail Sales
2:15pm: Bank of Canada Governor Macklem speaks
2:30pm: Canadian Retail Sales
4:00pm: Eurozone Consumer Confidence
5:00pm: ECB President Lagarde speaks

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