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Foreign Exchange Analysis ~ 02 October 2023


GB Pound

Sterling fell to a six-month low against the dollar on Tuesday before recovering toward the end of the week.


What to watch for in the short-term?

Revision of GDP data by ONS showed that the UK economic output grew a better-than-expected 0.6% in Q2, which could provide some temporary support to the pound.


September has been one of the worst months since Liz Truss’s mini-Budget for the Sterling, as traders shifted interest rate expectations and UK recession fears rise.

With no significant data released this week, market sentiment will likely dictate the currency movement.


What about the coming months? With markets now pricing in a 50% chance of no further rate increases from the current level (5.25%) and several data releases indicating a rapidly slowing economy, we expect the pound to remain under pressure for the rest of the year.


Calendar

Monday 16.00 BST | BoE's Mann speech


US Dollar

What happened last week? The Dollar index climbs to 10-month high, as the resilience of the US economy vs its peers keeps the greenback in demand. Fears of a partial US federal government shutdown weighted on the currency toward the end of the week, before easing as US Congress avoided government shutdown in last-minute deal. What to watch for in the short-term? Strong US economic data and inflation now appearing to be picking up again, driven by higher fuel prices, have pushed EURUSD at the lowest level since beginning of the year. GBPUSD also touched a 6-month low, with further downside potential still available. A busy USD calendar includes key job data on Friday, with the market expecting another 170-180k increase in jobs and unemployment rate moving back toward 3.7%. Should the figures come out worse than market consensus, expect a sharp dollar correction on Friday. What about the coming months? Higher long-term yields in the U.S. for a longer period should guarantee a strong support to the US currency in the coming months. Calendar Monday 16.00 BST | Fed's Chair Powell speech Wednesday 15.00 | ISM Services PMI (Sep) Friday 13.30 | Nonfarm Payrolls (Sep)


Euro

What happened last week? The euro experienced a sell-off during the first half of last week, fuelled by a sharp drop in Eurozone lending activity and ECB President Christine Lagarde hinting to further economic weakness in Q3. The single currency then rebounded, helped by eurozone’s inflation level unexpectedly dropping to 4.3% last month, the lowest level in 2 years. What to watch for in the short-term? A variety of Eurozone economic data could trigger some turbulence to the single currency, with downside risk more pronounced in case of disappointing retails sales and job data. Widening BTP-Bund spread as a result of the Italian government decision to increase its projected fiscal deficit for 2023 could further depress the single currency. What about the coming months? With higher oil prices and a recession becoming increasingly clear in the euro area, we expect the Euro to remain under pressure for some time, especially against the dollar. EURUSD is currently sitting at an important technical support (1.05) and a clear break below could see the pair moving again toward parity. Calendar Monday 10.00 BST | Unemployment Rate (Aug) Wednesday 10.00 BST | Retail Sales (Aug) Wednesday 17.00 BST | ECB's President Lagarde speech





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