Sterling snapped 6-day decline but still on track for big drop

Reuters: The British pound Sterling snapped 6-day decline on Thursday as the dollar’s relentless rally paused, but was still on track for a near 4% drop this month as markets trimmed peak rate expectations for the Bank of England.

BRITISH POUND STERLING SNAPPED 6-DAY DECLINE

The pound was last up 0.5% against the greenback at $1.2201, having fallen more than 2% in the previous six trading days, its biggest fall in that timeframe since July. Sterling also edged up 0.2% to 86.36 pence per euro , having hit its weakest level in four months earlier this week.

The Bank of England last week left interest rates unchanged, refraining from hiking the Bank Rate for the first time since December 2021, amid signs that the economy is slowing and inflation is beginning to fall towards its 2% target. “The unchanged decision and the lack of hawkish guidance shows they are more firmly closing the door to further rate hikes,” said Kirstine Kundby-Nielsen, analyst at Danske Bank. “The tail risk that they were going to hike more had been supporting the pound but removing that tail has been detrimental to sterling,” Kundby-Nielsen added.

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Money markets are still pricing in one more rate hike from the BoE, which would take the Bank Rate to 5.5%. However, that remains well below previous market expectations for a peak above 6%. The pound hit a six-month trough of $1.2111 on Wednesday following a 3.8% drop so far this month. It was on track for its biggest monthly fall against the dollar in a year, or since former British Prime Minister Liz Truss’s economic agenda sent UK assets reeling. Analysts said the speed of the move has been “significant” and the pound could be set to move higher in the near term. “It might be time for a short-term rebound or at least some consolidation at current levels given the extreme oversold conditions,” Convera currency analysts George Vessey and Boris Kovacevic said. “We do feel the pound is overdue some relief,” they added, saying $1.23 could be a potential upside target.

U.S. DOLLAR

Reuters: In foreign exchange market, the dollar index eased 0.057% to 106.10 but hovered near the 10 month high of 106.84 it touched earlier this week. The index is up 2.4% this month and set for second straight month of gains. The Japanese yen was at 149.33 per dollar, perilously close to the 150 level which is viewed as potentially spurring intervention from Japanese authorities.

Core inflation in Japan’s capital slowed in September for the third straight month mainly on falling fuel costs, data showed on Friday, suggesting that cost-push pressures are starting to peak, in a relief for the fragile economic recovery.

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SOUTH AFRICAN RAND

TradingEconomics: The South African rand traded around 19 per USD, holding close to the three-month low of $19.2 hit on September 5th, pressured by a resurgent dollar and concerns about the country’s fiscal outlook along with a power shortfall. Local investors are concerned that the mid-term budget in early November will reveal a wider-than-expected deficit, amid dwindling tax revenue, state-owned company bailouts and persistent power shortages.

Meanwhile, South African Reserve Bank (SARB) Governor Lesetja Kganyago, during his monetary policy deliberation on September 21, emphasized that deteriorating public finances risked fueling price pressures, which could force local rates to remain elevated for some time.

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GLOBAL MARKETS

Reuters: Asian shares had their best day in weeks on Friday but were still on track for their worst quarterly performance in a year as worries over elevated interest rates dragged on sentiment, while the dollar wobbled and oil prices held their ground. MSCI’s broadest index of Asia-Pacific shares outside Japan gained 1%, and were set for their biggest one-day percentage rise in four weeks. The index though remained close to the 10-month low it touched on Thursday and was set for a 4% drop in the July-September period, its worst quarterly performance since a 13.6% drop in the same period last year.

Futures indicated that the relief rally might continue in Europe, with the Eurostoxx 50 futures up 0.07%, German DAX futures up 0.19% and FTSE futures up 0.12%. Investors are watching out for the U.S. personal consumption expenditures price index due later on Friday, but before that euro zone inflation data will take the centre stage. Economists polled by Reuters expect the inflation rate across the 20 countries that use the euro to fall to 4.5% in September from 5.2% in August. Data on Thursday showed German inflation fell in September to its lowest level since Russia launched its full-scale invasion of Ukraine.

The recent rise in Treasury yields to 16-year highs has cast a shadow over the stock market, with the Federal Reserve’s hawkish tilt last week also weighing on risk sentiment. Data showed the U.S. economy maintained a fairly solid pace of growth in the second quarter and activity appears to have accelerated this quarter, but a looming government shutdown and an ongoing strike by auto workers are dimming the outlook for the rest of 2023. “During the most recent Fed press conference, Fed Chair Jerome Powell mentioned that while the Fed doesn’t target levels of real GDP, it evaluates whether it poses a risk to achieving the 2% inflation target,” said Ryan Brandham, head of global capital markets, North America at Validus Risk Management.

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“From this perspective, the current GDP figure is not seen as a significant threat and may provide some comfort in an otherwise concerning inflationary environment.” In rest of Asia, Japan’s Nikkei was 0.34% lower, while Australia’s S&P/ASX 200 index rose 0.56%. Hong Kong’s Hang Seng Index surged 2.7%. The Chinese markets were closed for a holiday and are on a break next week. Investor focus is zeroed in on the Chinese property sector after China Evergrande Group said its founder is being investigated over suspected “illegal crimes”. In Asian hours, the yield on 10-year Treasury notes eased 0.5 basis points to 4.592%, inching away from the fresh 16 year peak of 4.688% it touched on Thursday.

In foreign exchange market, the dollar index eased 0.15% to 106 but hovered near the 10 month high of 106.84 it touched earlier this week. The index is up 2.4% this month and set for second straight month of gains. The Japanese yen was at 149.35 per dollar, perilously close to the 150 level which is viewed as potentially spurring intervention from Japanese authorities. Core inflation in Japan’s capital slowed in September for the third straight month mainly on falling fuel costs, data showed on Friday, suggesting that cost-push pressures are starting to peak, in a relief for the fragile economic recovery.

Oil prices regained grounds on Friday after a brief pause in rally as traders weighed expectations of supply increases by Russia and Saudi Arabia versus forecasts of positive demand from China during its Golden Week holiday. U.S. crude fell 0.02% to $91.69 per barrel and Brent was at $95.05, down 0.35% on the day. Gold prices were braced for their biggest monthly fall since February, hovering around six-month lows. Spot gold was little changed at $1,864.75 an ounce.

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Published by the Mercury Team on 29 September 2023