Sterling Struggles Amidst Geopolitical Uncertainty, Euro Faces Headwinds and USD Regains Momentum
GBP
Sterling faced additional downward pressure against the Dollar, extending its correction below the critical support level at 1.2200. This decline in GBP|USD coincides with a shift in market sentiment towards increased risk aversion. The primary reason for this shift is the ongoing Israel-Hamas conflict, which has raised concerns about potential global repercussions.
The conflict began when the Palestinian military group, Hamas, launched an unprecedented attack on Israel on October 7. This geopolitical development has introduced an element of uncertainty into the currency markets, prompting investors to adopt a risk-off approach.
GBP|USD experienced a brief recovery over the past week, finding support near the 1.2050 level. This rebound was partly driven by BoE’s confidence in achieving price stability. BoE Governor Andrew Bailey expressed optimism regarding inflation, suggesting it could decrease to 5% or even lower by year-end. This outlook aligns with UK Prime Minister Rishi Sunak’s commitment to reducing inflation to 5.2% by the end of 2023.
BoE policymaker Ben Broadbent also emphasised the potential for price stability within a two-year timeframe. Notably, he pointed out the “clear signs” that higher interest rates have impacted demand and elevated the unemployment rate. This rise in interest rates has notably affected the UK’s Manufacturing and Construction Purchasing Managers’ Index (PMI), with September figures indicating contraction. S&P Global reported a UK Construction PMI of 45.0, well below expectations and the threshold of 50.0, which signifies a contraction.
In the upcoming week, investors and speculators will be closely monitoring the release of the UK’s Financial Policy Committee (FPC) meeting minutes, scheduled for Tuesday at 09:30. The FPC, an official committee of the BoE, focuses on macroeconomic and financial issues that could impact the UK economy’s long-term growth prospects.
Additionally, attention will be directed towards UK factory activity data for August. Although Industrial and Manufacturing Production data are expected to show continued contraction, albeit at a slower rate, they remain essential indicators for gauging the state of the UK economy.
EUR
The Euro faced challenges last week, as Germany’s manufacturing PMI dropped to 39.6, signalling contraction. While the Euro initially rose, it later weakened due to a stronger Dollar.
Midweek, the Euro declined against the Pound due to disappointing retail data. Despite positive PMI figures, concerns about Q3 GDP weighed on sentiment.
Thursday brought a glimmer of hope for the Euro, with relatively optimistic remarks from the European Central Bank’s (ECB) Luis de Guindos. The central bank’s vice president pointed out that various inflation indicators had begun to ease. These comments followed Christine Lagarde’s statements regarding the central bank’s commitment to maintaining borrowing costs at “sufficiently restrictive levels for as long as necessary.”. However, at the end of the week EUR faced headwinds from strong US nonfarm payrolls data, ultimately leading to USD strength.
Looking ahead to the coming week, the Euro may be influenced by the release of US inflation data on Thursday. Any signs of easing headline inflation could lead to a relaxation of monetary policy tightening measures by the Federal Reserve, potentially denting the USD and providing support to the Euro.
Additionally, forecasts suggest a potential drop in German industrial production, which could exert downward pressure on the EUR. In contrast, UK retail data is expected to show an increase in September’s sales, and UK GDP data may reveal economic expansion in August, further bolstering GBP|EUR.
USD
The US Dollar Index staged a recovery after a correction that brought it close to the 106.00 mark. This resurgence was supported by cautious market sentiment and the growing anticipation of another interest rate hike by the Fed, prompted by an encouraging Nonfarm Payrolls report for September.
The NFP report unveiled a robust addition of 336,000 fresh jobs in the US labour force, surpassing estimates that were set at around 170,000. Notably, it marked a significant increase compared to the upwardly-revised 227,000 jobs added in the previous report. The Unemployment Rate held steady at 3.8%, slightly above the expected 3.7%.
In terms of wage growth, the monthly rate saw a 0.2% increase, falling slightly short of the anticipated 0.3%. Furthermore, the annualised wage rate decelerated to 4.2%, compared to both estimates and the previous release at 4.3%.
The US economy has demonstrated resilience, primarily attributed to tight labour market conditions, robust consumer spending, and a revival in factory activities. These factors contribute to a persistent concern about inflation, reinforcing expectations of further policy-tightening measures.
Looking ahead, the US Dollar is poised to remain volatile in the coming week, with investors and speculators closely monitoring the release of consumer inflation data for September, scheduled for Thursday.
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