FX Daily: Hawkish Fed pause vs. dovish ECB/BOE hikes
DXY ended Thursday at 105, its highest close since 9 March. The boost came from a surprising dip in US initial jobless claims to a seven-month low of 216k for the week ending 2 September; consensus had expected an increase to 233k from 229k (revised from 228k). Thursday’s rise built on Wednesday’s gains from an equally impressive jump in the ISM Services PMI to 54.5 vs. the consensus for a moderation to 52.5 from 52.7. Like the ISM manufacturing PMI survey, services reported stronger prices paid and employment data. Hence, US CPI data on 13 September will be important before the FOMC meeting a week later. Given the stronger price reports in many countries, consensus expects US CPI inflation to accelerate to 3.6% YoY (0.5% MoM) in August from 3.2% YoY (0.2% MoM) in July. If so, interest rate futures may reassess the current bets for a possible Fed hike later in November (39.3% odds) instead of September (6.8% odds). Given the resilience of the US economy against the weaker European economies, we view this month’s Fed pause as hawkish and any hikes by the European Central Bank and the Bank of England as dovish.
EUR/USD’s tone remains weak after closing below 1.07 for a second day. The intra-day low of 1.0686 of 1.0686 was within striking distance of the 1.0635 low on 31 May. Interest rate futures see a 34.9% chance for the European Central Bank to lift the refi rate by 25 bps hike to 4.50% on 14 September. However, EUR bulls are more worried about the hiking cycle ending from the ECB’s narrative increasingly shifting towards keeping rates at a “high plateau.” Unlike the US, the Eurozone economy was not as resilient as initially thought. Eurostat revised 2Q GDP growth to 0.1% QoQ from its preliminary 0.3% estimate. The outlook for 3Q is not any better. The ZEW expectation of economic growth was negative for a fourth month into August. Sentix Investor Confidence deteriorated to more than -20 in July and August. HCOB manufacturing and services PMIs fell below the breakeven 50 level in August, together for the first time since December. Hence, markets fear more ECB hikes would tip the Eurozone economy into recession.
GBP/USD depreciated 0.3% to 1.2472. In closing below 1.25 for the first time since 7 June, GBP gave back half the runup from 1.18 to 1.3140 over March-July. GBP brushed off the high odds (82% implied from interest rate futures) for the Bank of England to deliver a 25 bps hike to 5.50% on 21 September. BOE Governor Andrew Bailey testified before the Treasury Select Committee that UK rates were “much nearer the top of the cycle.” Many BOE members believe monetary policy is restrictive, as evidenced by the sharpest drop in home prices in 14 years, tightening credit conditions, rising corporate indebtedness, and worries over commercial real estate. Given the weaker economic landscape, the BOE’s future rate decisions will become “very finely balanced” with its narrative tilting towards keeping rates high for an extended period.
Quote of the day
“I declare before you all that my whole life, whether it be long or short, shall be devoted to your service and the service of our great imperial family to which we all belong.”
Queen Elizabeth II
8 September in history
Queen Elizabeth II died at Balmoral Castle as UK’s longest serving monarch in 2022.
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