13 Nov FX outlook – USD, EUR, GBP, CAD, AUD, NZD

USD

The US dollar was the top performer this week, as the Federal Reserve’s reassurance about its commitment to controlling inflation coupled with haven demand to drive the global reserve currency higher. At the beginning of the week, investors showed a reluctance to invest in USD, due to the poor jobs report, which saw many flock towards other risky assets. However, the USD corrected higher by around +1.19%, with the DXY moving above 105.50.

The past week was marked by comments from important central bank officials, including the Fed chair as investors were looking for clues about the monetary policy outlook. The Fed’s decision to keep interest rates unchanged, along with a dovish statement, led many to believe that the central bank may have reached the peak of its rate hike cycle. However, things changed this week when Fed Chair Jerome Powell expressed low confidence in the central bank’s monetary policy campaign. He mentioned that there could be more rate hikes if inflation fails to decrease.

In the upcoming week, all eyes will be on the October CPI inflation report from the US. The Federal Reserve is closely monitoring the data to ensure it aligns with its current monetary policy decision. The general expectation is that inflation may show signs of easing, which could result in the end of the USD correction and further appreciation in the stock market. However, if the outcome is hotter than expected, it could prompt the dollar bulls to further drive the greenback upwards. Also keep an eye out for the attempts to avert a government shutdown, with the deadline for a deal coming at the end of the week.

EUR

Last week, the euro performed well against other major currencies, with the single currency taking place as one of the outperformers over the period. Unfortunately for EURUSD bulls, the US dollar proved too strong last week, with the Federal Reserve’s hawkish comments helping to drive the pair down from its peak of 1.0760. Nonetheless, the euro did enjoy a particularly strong week against the likes of the Australian dollar and New Zealand dollar.

The euro’s strength came despite ongoing concerns around the economy, with markets widely expecting that the ECB have reached the end of their hiking phase. The latest services PMI data highlighted continued contraction in the region, with the weight of higher rates clearly taking a toll. Comments for ECB’s Lagarde highlighted a confidence that CPI will eventually return to 2% in the event that rates remain elevated, writing off the idea that we might see a rate cut in the first half of 2024.

The new week will continue to offer more light-tier data for the EUR as investors await the US inflation report which will impact heavily on the currency depending on the outcome. The European calendar looks to be dominated by revisions, with Tuesday’s third quarter GDP and Friday’s final CPI numbers providing potential volatility. Also watch out for additional commentary from ECB President Lagarde.

GBP

The pound saw a choppy week just gone, finding itself in the middle of the pack against its peers. On the positive side, sterling gained ground against the euro, Australian dollar and New Zealand dollar in particular. However, emergence of some selling pressure in equity markets helped lift havens such as the dollar, which ultimately drove GBPUSD back down into the lows seen prior to the US jobs report.

Last week saw a host of economic data releases, kicking off with a lower-than-expected construction PMI reading of 45.6. The past two-months represent the worst figures in the past three-years, highlighting concerns around UK housebuilding amid higher interest rates. Those fears were heightened with the latest third quarter construction orders figure of -20%. Friday represented the central focus for the pound, with the latest GDP data released alongside a host of other key economic figures. The UK continues to avoid contraction, with the latest third-quarter GDP figure of 0% highlighting the ‘soft-landing’ that is underway. Similar figures across monthly industrial (0%) and manufacturing (0.1%) production figures for September highlight an economy that is struggling but not necessarily in crisis mode. This could be a positive from the perspective of driving down inflation, helping alleviate expectations of further rate hikes from the BoE.

Looking ahead, Wednesday’s inflation report will undoubtedly take centre stage as we move through the week. Coming off the back of a period where we saw little headway made on the headline CPI figure, this week looks to see a sharp collapse in headline CPI as the October 2022 reading of 2% drops out. As such, we are almost guaranteed a sharp pullback for UK CPI on Wednesday, alleviating fears that the BoE may need to hike again. Also watch out for Tuesday’s jobs report, where particular attention will be on the average earnings figure which stands at a worrying 8.1%. Finally, Friday brings the latest retail sales release, which will become increasingly important as we approach the key November and December period for retailers.

CAD

It was a tale of two halves for the Canadian dollar, with weakness in the early part of the week giving way to a strong finish. All-in-all, the index was roughly around the middle of the pack as a result. That comes despite a period of significant weakness in energy markets, with Crude oil losing over -4% on concerns around Chinese demand.

While we recently saw Canadian growth come in at a worrying 0%, last weeks data was clearly enough to overshadow the sharp losses seen in energy markets. The Ivey PMI acted as the main event, with this wider PMI metric managing to remain well above the 50 threshold to signal a widespread expansion within the economy. Crucially, we saw a sharp decline in the prices segment of that index. We also saw the Canadian trade surplus rise to $2 billion, helped by an oversized 2.7% rise in exports despite a weaker 1% import figure.

Moving forward, Canada looks set for a relatively quiet week on the economic front, with few notable releases due. Nonetheless, we are expecting plenty of volatility with the release of US CPI figure likely to impact risk sentiment. Keep an eye out for volatility in the energy markets given the impending data dump from China, with speculation over the potential rise in retail sales bringing the recent concerns over Chinese demand back into focus.

AUD

The Australian dollar spent much of last week unwinding the gains seen in the week prior, with sentiment taking a turn for the worst. Unfortunately for AUD bulls, the currency found itself at the bottom of the pack. Particular losses took shape against the likes of the US dollar and euro, with the Aussie dollar steadily losing ground over the course of the week.

Interestingly, the weakness of the Australian dollar came in spite of the 25-basis point rate hike from the Reserve Bank of Australia. That move was widely expected, with markets pricing in a 50/50 chance that we see another hike by June. While markets are widely expecting a rate pause in December, there is clearly a strong chance that we see one final hike in this cycle. Nonetheless, the current RBA cash rate of 4.35% remains well below the likes of the Fed (5.50%), RBNZ (5.50%), and BoE (5.25%). As such, these late 25bp hikes appear to be doing little to convince people that the Australian dollar in the place to look for strength. In terms of China, last week saw the trade balance deteriorate thanks to a worrying -6.4% export figure. This will likely weigh on the growth outlook going forward.

Looking ahead, inflation remains a key concern, with the latest wage price index and inflation expectations figures released later in the week. With CPI having recently moved up to 5.6%, the outlook for underlying price pressures will be key for sentiment. Also watch out for the latest Australian jobs report, with any signs of economic weakness taken as a potential sign that the RBAS may hold off on another hike. Nonetheless, with unemployment remaining low, a slight uptick would do little to shift sentiment for now.

NZD

Much like the Australian dollar, NZD lost ground over the course of the past week. While AUDNZD weakness did highlight strength against its neighbor, the New Zealand dollar spent much of the week on the back foot. While it weakened against all of the other currencies mentioned here, particular losses came against the likes of the US dollar and the euro.

Last week saw the quarterly inflation expectations figure provide the release of note, with the third quarter figure coming in at 2.76%. This is only a marginal improvement on the 2.83% seen in the second quarter. Given that this represents the outlook for inflation in two-years’ time, there is a clear view that prices will remain above target for some time yet. The latest GDT dairy price index took an unwelcome step backwards, with the reading of -0.7% representing the first negative figure since mid-August. We also saw concerns emerge from China, with exports (-6.4%) continuing to struggle as the economy fell into deflation once again (-0.2%).

Looking ahead, a relatively quiet week for New Zealand data should shift the focus on to China. The key trade partner will be releasing a raft of data points mid-week, with retail sales a particular focus for New Zealand exporters. Questions over the strength of Chinese consumption have weighed on AUD and NZD. With that in mind, the predicted rebound in retail sales could lift NZD if it comes to fruition. Also watch out for the New Zealand PPI figure, with the second quarter drop into negative territory (-0.2%) having helped ease wider inflation concerns.