STORY LINK Foreign Exchange Rates: Middle East Fears to Dominate Pound vs Euro and Dollar
Position Adjustment and Middle East Fears Will Dominate Short-Term Pound and Euro Exchange Rate Moves Against the Dollar
Position adjustment will be a key element during Friday on both geo-political and economic grounds.
Overall risk conditions have remained vulnerable with further losses in equities on Thursday. There will be interest in bargain hunting after significant losses.
A key element will, however, be caution ahead of the weekend and this is likely to keep risk trends broadly on the defensive.
There will be important concerns surrounding the Middle East, especially with fears that there will be escalation during the weekend when markets are closed.
Overnight, the US carried out strikes on two sites in Syria against Iran-backed militia groups and there will inevitably be concerns over Hezbollah attacks on Israel and a widening regional conflict.
Israel is also still preparing for a ground assault into Gaza. Diplomatic efforts will also be a key element.
IG market analyst Tony Sycamore, commented; “The last few Fridays we’ve seen very much flight-to-safety type moves (because) ahead of the weekend, we’re not really sure what’s going to be playing out in terms of Gaza.”
There will be a mixed dollar impact as defensive buying of Treasuries would lower yields and potentially curb dollar support.
As far as the economic outlook is concerned, the US data has done nothing to erode the argument of US exceptionalism while the ECB policy decision failed to cause more than limited ripples.
There will be position adjustment ahead of the Federal Reserve, Bank of Japan and Bank of England policy decisions next week.
There will be further speculation of a tweak in Bank of Japan policy, especially with the Dollar to yen (USD/JPY) exchange rate trading just above 150.00.
The dollar maintained a firm tone, although it failed to hold intra-day highs.
Speculation over Japanese tightening is likely to curb dollar support to some extent.
GDP increased at an annualised rate of 4.9% in the third quarter of 2023 from 2.1% the previous quarter and above consensus forecasts of 4.3%.
Consumer spending increased 4.0% from 0.6% previously.
The PCE prices index came in at 2.4% from 3.7% and compared with expectations of 2.5% which provided some relief over inflation trends.
According to CIBC; “The surge in GDP was well anticipated given monthly consumption readings and this validates our call for a final 25bp hike from the Fed in December, assuming that data flow continue to show a resilient consumer and continued strength in the labour market.”
Initial jobless claims increased to 210,000 in the latest week from a revised 200,000 previously which suggested that the labour market remained firm.
There were still expectations that the Fed would leave interest rates on hold in November and potentially for the remainder of this year. The overall releases, however, maintained expectations that rates would have to remain at a restrictive level for an extended period.
The US will release the latest PCE prices data on Friday. The headline annual rate is forecast to edge lower to 3.4% from 3.5%.
Expectations for the core index are for a 0.3% increase from 0.1% previously, but with the annual rate slowing to 3.7% from 3.9%.
Stronger-than-expected data would trigger fresh unease over US interest rate trends and tend to put upward pressure on yields.
Weaker than expected data would trigger a limited relief rally.
The ECB held the main refi interest rate at 4.50% following the latest council meeting which was in line with consensus forecasts.
This was the first decision not to increase rates after 10 successive hikes.
The ECB stated that inflation is still expected to stay too high for too long and domestic price pressures remain strong.
Monetary transmission was, however, strong with weaker demand helping to curb inflation pressures.
It added that the governing council decisions will ensure that policy rates will be set at sufficiently restrictive levels for as long as necessary.
Bank President Lagarde stated that this was no time for forward guidance.
The Euro secured a slight recovery after the ECB decision with an element of short covering, although overall moves were limited and EUR/USD settled around 1.0550.
A lack of confidence in the Euro-Zone outlook and expectations of rate cuts next year will sap Euro support with very limited scope for EUR/USD gains.
The Pound was broadly resilient during Thursday despite weak data, fragile risk conditions and a slide in equities.
The latest CBI retail sales survey declined to –36 in October from –14 in September. This was well below consensus forecasts of -16 and the second-weakest reading since March 2021. It was also the sixth successive reading in contraction territory.
Retailers expect a further decline in November, although the rate of decline is expected to moderate.
Despite economic concerns, the Pound to Dollar (GBP/USD) exchange rate found some support below the 1.2100 level and rallied to 1.2130 and was held around 1.2120 on Friday.
There will be position adjustment ahead of next week’s Bank of England policy decision with some scope for an unwinding of short positions.
Nevertheless, the Pound is unlikely to make significant headway given the overall defensive global tone and there is still the threat of a GBP/USD slide to 1.2000.
The Pound overall was mixed on the crosses.
New Zealand recorded an improvement in consumer confidence for October to 88.1 from 86.4 previously.
The Pound to New Zealand dollar (GBP/NZD) exchange rate found support close to 2.0800 and advanced to 2.0850.
The Pound to Australian dollar (GBP/AUD) exchange rate was unable to hold above the 1.9200 level and retreated to 1.9140.
The Canadian dollar came under pressure as oil prices declined.
The Pound to Canadian dollar (GBP/Cad) exchange rate found support at 1.6660 and rallied strongly to near 1.6780 before settling around 1.6750.
The Pound to Yen (GBP/JPY) exchange rate found support below 181.50 and rallied to 182.10.
The Pound to Swiss franc (GBP/CHF) exchange rate advanced to above the 1.0900 level.
The Pound to Norwegian krone (GBP/NOK) exchange rate strengthened to 3-month highs around 13.63 before a limited retreat to 13.57.
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