FX Daily: EUR, GBP, and CHF have more room to fall on “dovish” hikes
The European Central Bank’s (ECB) tenth hike sank EUR/USD by 0.8% to a six-month low of 1.0643. The Euro Stoxx 50 stock market index surged 1.3% to 4280, and the EU 10Y bond yield eased 5.8 bps to 2.59% on the ECB’s hints that the hiking cycle may have peaked. Although the ECB did not close the door on future data-dependent hikes, the statement emphasized for the first time that “interest rates have reached levels, if maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.” The market’s stagflation worries were evident in the ECB’s forecast revisions, which were identical to the European Commission’s projections released on Monday. The ECB and the European Commission (EC) lifted the 2023 and 2024 forecasts for CPI inflation and lowered the projections for core inflation and economic growth. We see the ECB keeping rates unchanged into the first half of next year before cutting them in 2H24.
Protectionism gets uglier, not positive for European and Asian currencies. Apart from predicting a German recession this year, the EC axed its 2023 global trade growth forecast to 0.2% from 1.3%. The commission subsequently launched an investigation into China’s state subsidies for its electrical vehicle manufacturers, which China has criticised as “blatantly protectionist.” Yesterday, France ordered Apple to stop selling its iPhone 12 models for exceeding the radiation exposure limits or risk a recall. Belgium and Germany have followed up with similar probes. Meanwhile, China denied banning the purchases of iPhones but cited unspecified security concerns. With China not outrightly rebuffing earlier reports regarding its plan to ban government and officials from using iPhones, the White House is monitoring the situation closely. Industry watchers have warned of retaliation from US President Joe Biden’s decision in August to ban some US technology investments in China.
Following the ECB’s counter-consensus rate increases, the market is not ruling out a Fed hike at the FOMC meeting on 20 September. US CPI inflation accelerated on energy prices to 3.7% YoY in August, above the 3.6% consensus, after rising to 3.2% in July from its 27-month low of 3% low in June. WTI crude oil prices rebounded by 33.7% from its low in June to USD90.16/barrel, its highest level since November. In July, the Fed delivered only one of the two hikes in the June Summary of Economic of Projections (SEP). The coming SEP will be more important than the rate decision in signalling if the Fed is done hiking rates.
On 21 September, consensus expects the Bank of England and the Swiss National Bank to join the ECB in delivering their final “dovish” hikes. UK recession fears are back after GDP contracted by 0.5% MoM in July, its worst reading since the mini-budget crisis last September. In Switzerland, the 3-month moving average for the KOF leading indicator slowed to 91.1 in August from the 98.9 high in March. The Swiss economy reported 0% QoQ sa growth in 2Q23 after a stronger-than-expected 0.3% expansion in the previous quarter. Hence, we see the EUR, GBP, and CHF giving up more gains from the USD sell-off in November 2022-January 2023. CAD and JPY have already depreciated to their lows in early November.
Quote of the day
“The philosophy of protectionism is a philosophy of war.”
Ludwig von Mises
15 September in history
Lehman Brothers filed for Chapter 11 bankruptcy protection in 2008.
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