Daily Currency News 06.09.23: Bond Market Fears, Energy Prices Key To Pound Sterling Vs Dollar, Euro – Exchange Rates UK

06.09.23: Bond Market Fears and Energy Prices to Drive Near-Term Sterling and Euro Moves Against the Dollar
Saudi Arabia and Russia announced on Tuesday that crude oil production curbs will be extended for three months until the end of 2023.
In response, oil prices posted further gains with WTI posting 10-month highs and Brent also testing the $90.00 level for the first time since November 2022.
There has been renewed upward pressure on bond yields which has also undermined equity markets.
The increase in oil prices will have important implications for inflation rates.
bannerDuring most of 2023 the base effects for headline inflation have been favourable given that energy prices have fallen on an annual basis.
The comparison was already going to be more difficult over the next few months as favourable trends fade and the increase in oil prices will put further upward pressure on headline inflation rates.
There will, therefore, be the risk of a fresh increase in inflation expectations and further upward pressure on wages.
These pressures will also increase concerns within central banks and make it much more difficult for banks to contemplate any cut in interest rates.
There will also be fears that rates will have to be increased further which will undermine the narrative of monetary easing during 2024.
In this environment, risk appetite is liable to remain vulnerable in the short term, especially if oil prices weaken further.
Currencies of oil-producing countries will gain an element of support.
There was an upward revision to the UK PMI services-sector index which provided an element of Pound support, although global developments dominated the Pound on Tuesday.
With fragile risk appetite and dollar gains, the Pound to Dollar (GBP/USD) exchange rate dipped to 11-week lows at 1.2530 before a recovery to 1.2575.
GBP/USD was able to hold around 1.2570 on Wednesday, although confidence remained fragile
Risk conditions will remain important on Wednesday while high oil prices will provide an element of support for the Pound.
Comments from Bank of England officials will be watched closely with Governor Bailey and other MPC members due to testify before the House of Commons Treasury Select Committee.
There will be a substantial reaction if Bailey suggests that interest rates will not be increased further, although Bailey is likely to be non-committal and reiterate the inflation fight.
Even if BoE comments are not dovish, GBP/USD is still at a risk of a decline to the 1.2500 area unless there is a strong recovery in risk appetite with selling on significant rallies.
The latest Euro-Zone data recorded a downward revision to the Euro-Zone PMI services-sector index with contraction confirmed and the weakest reading for 31 months.
The data reinforced concerns surrounding the Euro-Zone outlook and the Euro came under renewed pressure.
With a firm dollar and weakness in equities, the Euro to Dollar (EUR/USD) exchange rate dipped to 12-week lows near 1.0700 before a tentative recovery to 1.0730.
Euro confidence will remain vulnerable in the short term and the increase in energy prices will increase stagflation fears.
Credit Agricole commented; “any escalation of the stagflation concerns could become a major negative for both the EUR and GBP.”
It added; “Indeed, a potential episode of weak growth and sticky inflation should undermine the credibility of the ECB’s and BoE’s hawkish forward guidance and thus erode the real rate advantage of the two currencies. A stagflation scenario for the Eurozone in particular could further undermine the appeal of its stock and bond markets.”
Overall, the Euro is likely to remain on the defensive in the short term.
The May 31st EUR/USD low of 1.0635 will be a focus if selling continues.
There were no significant US data releases on Tuesday.
Fed Governor Waller stated that last week’s jobs data clearly showed that the labour market is starting to soften.
He added that recent data will allow the Fed to process carefully while the risks of doing too much and too little are roughly balanced.
The comments suggested that the Fed would leave rates on hold in September, matching market expectations.
Cleveland head Mester was more hawkish and stated that rates might have to go a little higher.
Although the rhetoric was broadly neutral, there was significant upward pressure on bond yields with the 10-year yield at 10-day highs.
Higher yields boosted the dollar and overall risk conditions were also fragile which provided US currency support amid unease over the global growth outlook.
The dollar index posted the highest level for 25 weeks before a limited correction as the Chinese central bank supported the yuan.
There will be scope for a sharp dollar correction if there is actual intervention by the Bank of Japan to support the yen, but the dollar overall will secure solid buying on dips at this stage.
The Pound to Yen (GBP/JPY) exchange rate rallied strongly on Tuesday to 185.75 from 184.00 lows.
Japan’s vice finance minister for international affairs Kanda stated that he is watching FX markets with a sense of urgency and won’t rule out any options.
Fears over intervention triggered some respite for the yen with GBP/JPY retreat to 185.30.
Australian GDP data was slightly stronger than expected with 0.4% growth for the second quarter from 0.3% previously.
The Pound to Australian dollar (GBP/AUD) exchange rate hit 2-week highs just below 1.9750 on Tuesday before a retreat to 1.9695 after the GDP data.
The Pound to New Zealand dollar (GBP/NZD) exchange rate hit 2-week highs at 2.1400 before a retreat to 2.1350.
Higher oil prices provided some protection for the Canadian dollar with the Pound to Canadian dollar (GBP/CAD) exchange rate settling around 1.7150.
The Pound to Swedish krona (GBP/SEK) exchange rate hit 2-week highs at 13.97 before a marginal correction.
The latest US ISM non-manufacturing data will be released on Wednesday.
Consensus forecasts are for a slight slowdown to 52.5 from 52.7 previously. The employment and pricing components within the data will also be important.
The Federal Reserve will also release the Beige Book on economic conditions.
The Bank of Canada will announce its latest policy decision on Wednesday.
Consensus forecasts are for interest rates to remain on hold at 5.00% with forward guidance important for the Canadian dollar.
Trends in US bonds and equity markets will be very important for overall market direction during Wednesday.
Chinese developments will remain a key influence on risk conditions and asset prices.
Rhetoric from Japanese officials will also be watched very closely following verbal intervention overnight.

Save money on your currency transfers with TorFX, voted International Money Transfer Provider of the Year 2016 – 2022. Their goal is to connect clients with ultra competitive exchange rates and a uniquely dedicated service whether they choose to trade online or over the telephone. Find out more here.
Tim Clayton
Tim is an economist and has been involved in financial markets for over 20 years as an analyst. He…
Contact Tim Clayton
August 16 2023
According to foreign exchange analysts at Rabobank, the Pound Sterling is tipped to trade within a range around the 1.041 level (inverse of the stated 0.96 EUR GBP) against the Euro over the next…
August 11 2023
The Pound Euro (GBP/EUR) exchange rate recovered on Friday after UK GDP data for June 2023 came in better than expected. At the time of writing, GBP/EUR traded at around €1.15566, 0.17%…
August 20 2023
GBP/EUR Exchange Rate: 12-Month Highs Within Reach, UK Yields Provide Short-Term Support Following the UK wages and inflation data there was a renewed shift in market pricing towards Bank of…
» Compare best exchange rates
» Best euro rate?
» Best Dollar rate?
» Best Australian Dollar rate?
» Best Canadian Dollar rate?

Copyright © 2006-2021 Exchange Rates UK. All rights reserved. The advice provided on this website is general advice only and does not constitute as a financial recommendation. Any news, opinions, research, analysis, values or other information contained on this story, by Exchange Rates UK, its employees, partners or contributors, is provided as general market commentary. Exchange Rates UK will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.


Leave a Comment