18 Sept FX outlook – USD, EUR, GBP, CAD, AUD, NZD

USD

The US dollar stretched its gains against other currencies for the 9th week in a row as positive economic data reports increased soft landing bets, wooing investors. The US dollar index is already up about +1.67% this month with the price now nearing a 6-month peak around 105.85.

An eventful week it was for the US dollar on the economic calendar as investors anticipated the latest CPI report. Although making a slow start to the week, the US dollar held up most of its gains from the previous week up until the release of the inflation report. The details showed the inflation reports came out hotter than expected with annual CPI rising from 3.2% to 3.7%. With the monthly core CPI reading also coming in above expectations (0.3%), this report raised questions over the potential need for further tightening from the Federal Reserve. With retail sales (0.6%) and weekly unemployment claims (220k vs 226K) both showing signs of improvement, there is an argument that the US economy remains strong enough to withstand further tightening if necessary.

Heading into the new week with the FOMC meeting at the center stage, investors are expecting the Federal Reserve to pause their tightening process once again. The Fedwatch tool signals a 99% chance that we will see the Fed maintain rates at their current level, but the recent rise in energy prices should provide plenty of interest around commentary from Powell/. Also keep an eye out for the US PMI survey due on Friday, with last month seeing the services sector fall into contraction for the first time since January.

EUR

The latest rate hike by the European Central Bank failed to impact the Euro positively, as Christine Lagarde took on a notably more dovish ECB tone at the press conference. That so-called ‘dovish hike’ brought a fresh move lower for the single currency, with the potential end to the hiking cycle bringing potential downside for the euro.

The economic outlook for the eurozone similarly remains on rocky ground, with growth forecasts from the EU downgraded last week. While they revised down their 2023 inflation forecast, that was negated by an upward adjustment to their 2024 outlook (3.2%). With the ECB signaling the end of its tightening campaign on falling inflation and rising recession risks, any changes to either growth or price data will be key for the euro.

This week sees final inflation data for August, as the pace of disinflation starts to slow. Thursday’s consumer confidence figure will also be notable, given the fact that last month saw the first decline in a year. Finally, Friday sees a raft of PMI survey data released throughout the European morning, with manufacturing across France, Germany, and the eurozone expected to tick higher. Nonetheless, with manufacturing heavily contracting, and services having slumped through the key 50 level, the eurozone growth story remains a worry for the ECB.

GBP

The pound has been hit hard over the course of the past week, with sterling losing ground against most of its peers. The wider backdrop of elevated inflation and subsequent potential for BoE rates to rise beyond levels seen at other central banks has come under pressure of late. With economic data on the slide, there are questions over whether the effects of higher rates are finally starting to play out.

Last week saw the latest UK jobs report, with unemployment on the rise, alongside average earnings. This highlights both the need for further tightening, but also the negative implications. Meanwhile, a surprise 0.5% contraction in UK GDP for July brought the joint worst month this year. That was heavily driven by strikes in the health sector, but there are certainly plenty of questions over the health of the UK economy. Finally, the release of negative industrial (-0.7%) and manufacturing (-0.8%) production data brought continued concerns over the direction of businesses throughout the manufacturing sector. With the ECB having employed a ‘dovish hike’, there are many who believe we could similarly see the Bank of England draw a line under their tightening cycle this week.

This week has plenty to get into, with Tuesday kicking off proceedings thanks to the latest inflation report. Market expectations signal the potential for an unwelcome rise in headline CPI, from 6.8%, to 7.1%. Expectations that the monthly reading could rebound to 0.7-0.8% in the month of August alone should sound the alarm for BoE members. We are expecting to see the core figure move lower, but the slow pace of disinflation on that front signals a long hard fought road back to target. With energy prices on the rise over recent months, inflation remains a big problem for the BoE.

Thursday sees the latest rate decision from the Bank of England, with markets expecting another 25-basis point hike from Bailey & co. Given the ECB decision to draw a line under their tightening phase for now, there will be a big focus on the tone and outlook from Bailey as we seek to gauge where we will stand by year-end. Finally, Friday brings a fresh batch of economic data, with retail sales, manufacturing, and services PMI surveys due. With the services PMI falling into contraction territory last month, this figure will be watched closely for signs that the economy is heading towards a period of negative growth.

CAD

The Canadian Dollar appreciated for the second week as it benefitted from rising oil prices spurred by OPEC production cuts and crude inventory drawdown. That energy-led story looks set to continue, with the push into $91 for WTI bringing fresh predictions of a potential pathway to $100. From an economic standpoint, things have been somewhat thin on the ground in terms of notable releases. However, the hawkish narrative from the Bank of Canada continues to lend support to the Loonie as we await this week’s pick-up in data.

This week, investors will see how much impact the Bank of Canada’s (BOC) monetary policy campaign has tamed price pressure with the latest inflation report set to be released on Tuesday. The Central Bank maintained rates at 5.00% at its last meeting as policy members cited a weaker growth outlook globally. However, it reiterated its commitment to bringing inflation to its target of 2% if it means continued tightening. With Tuesday bringing fresh inflation data out of Canada, any significant uptick would likely bring further gains for the CAD. Meanwhile, a significant decline in the Canadian inflation figure would likely put pressure on the Loonie.

AUD

The Australian dollar enjoyed a strong week just gone, with the currency particularly making ground on the likes of the euro, pound, yen, and Swiss franc. In part that has been a rebound in the wake of a protracted period of weakness for the AUD, reflecting fears around how the Chinese crisis might impact Australian economic health and monetary policy. Fortunately, last week saw some form of reprieve to that story, helping to boost the Australian dollar against some of its peers.

From an Australian perspective, the surprise 64.9k employment change reading brought a sign of strength that had not been predicted by many. The lack of any notable pick up in unemployment, coupled with a surge in employment does signal continued strength despite the potential knock-on effect of stuttering Chinese growth. From a China perspective, two rate cuts from the PBoC highlighted a willingness to continue their push to support the economy. Meanwhile, improved new loans, industrial production, retail sales, and unemployment brought hope that the economic powerhouse has started to turn things around.

Looking ahead, RBA minutes dominate the Australian calendar after their decision to keep rates steady in September. They cited the need for more time to evaluate the impact of the 400 basis-point rate hikes. The upcoming RBA minutes will likely echo these sentiments and will be closely watched for insights into what could trigger further tightening or an extension of the rate pause. Also watch out for the PMI data released on Friday, coming after a surprise slump in the services figure that took it to a 19-month low of 46.7.

NZD

The New Zealand dollar similarly enjoyed a relatively positive week just gone, although underperformed somewhat against its Australian neighbour. That strength has started to fade again this morning, with the wider downtrend evident in NZD likely to raise questions over whether any rebound is justified.

Last week’s strength similarly came through a more positive tone out of China, with supportive action from the PBoC and improved Chinese economic data helping to lift sentiment for related currencies such as the NZD. In terms of New Zealand data, a rebound in the FPI signalled a return to positive territory after a surprise -0.5% figure last month. However, we also saw the manufacturing index fall down to 46.1, with the services index starting off this week with a similar deterioration to the lowest level since early 2022.

This week also sees a focus on the New Zealand dairy price auction, with the NZD often seeing volatility around any major moves for their primary exports. Released twice a month, the last September figure provided a surprise rebound to 2.7% after seven consecutive months of decline. In terms of Chinese events of note, keep an eye out for the 1-year and 5-year loan prime rate for further signs of support from the PBoC on Wednesday.