Sterling has gone from being one of the strongest performers out of its G10 peers at the start of the year, to now being one of the worst, losing nearly 10-cents against the Dollar alone since summer. At the time of writing GBP|EUR and GBP|USD are both sitting around 1.1520 and 1.2080 respectively.
The halt in BoE interest rate hikes, combined with a steep slowdown in recent UK economic output readings has spooked investors & speculators about the Pound’s future.
A number of financial institutions have revised their predictions and now anticipate that Sterling could fall a lot lower over the next year. With Goldman Sachs being the most bearish, their analysts state we could see GBP|EUR as low as 1.0870 in the next 6 months.
More negativity for Sterling – UK PMI figures were released today. Even though there was a slight increase vs August figures, they are still showing an unhealthy contraction. S&P Global reported “The end of the third quarter saw the downturn at UK manufacturers continue. Output, new orders and employment were all cut back further, amid weaker intakes of new work from both domestic and overseas clients”.
With disappointing PMI figures, an overall negative outlook of the UK economy and a lack of data coming out of the UK, the Pound could be vulnerable to more losses this week.
The Euro (EUR) encountered a challenging start to the week as it struggled to find support. Several factors contributed to its weaker performance, including confirmation of a contraction in the Eurozone’s manufacturing sector, a decline in German consumer confidence, and recent Dollar strength.
Investor attention now turns to keynote speaker from the European Central Bank (ECB), scheduled to address the markets today. The tone of Lane’s speech will be closely monitored by market participants. If Lane strikes a hawkish tone, expressing optimism about the economy and the potential for further interest rate hikes from the ECB, the currency may strengthen as investors position themselves accordingly. However, should Lane align with recent ECB communication and adopt a cautious stance, the Euro could face further headwinds.
Looking ahead to the rest of the week, market focus will be on the finalised European services Purchasing Managers’ Index (PMI). Any signs of continued contraction within the Eurozone’s crucial service sector could further weaken the Euro.
The USD Index (DXY), tracking the US Dollar against a basket of major currencies surged to its highest point since November 2022. This uptrend finds strong support from the growing consensus that the Fed will maintain its hawkish stance. Market sentiment has increasingly factored in the possibility of another interest rate hike by year-end. US Treasury bond yields have soared to new multi-decade highs, further bolstering the US Dollar.
Beyond the Fed’s commitment to higher interest rates, the Dollar is reaping the benefits of a general risk-averse sentiment. This contributes to the Greenback’s appeal as a safe-haven currency and places downward pressure on GBP/USD. The initial market response to mixed Chinese PMI data and the approval of a US stopgap funding bill over the weekend was short-lived. Concerns surrounding economic headwinds stemming from the rapid surge in borrowing costs have persisted. This has driven investors to traditional safe-haven assets, strengthening the USD bulls.
Looking ahead for the week, investors and speculators will be scrutinising the US JOLTS Job Openings data, alongside developments in US bond yields. However, the primary focus remains on the upcoming US Non-Farm Payrolls (NFP) report scheduled for release on Friday.
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