Monex: Risk-off mood weighs on dollar

October 13, 2021

This is a commentary by Ima Sammani, FX Market Analyst at Monex Europe, on the USD, EUR and GBP exchange rates.

USD

As cautioned in yesterday’s morning report, developments in US fixed income instruments dominated market price action yesterday as bond traders caught up following US markets being closed on Monday.

Rising front-end yields spurred the dollar on, with the DXY index carving fresh 1-year highs at 94.561 as yield sensitive currencies like EUR and JPY plumbed fresh lows against the greenback.

With front-end Treasury yields still off yesterday’s highs, the dollar is retracing at the margin. However, with US CPI data due out at 13:30 CET, any signs of continued inflationary pressure are likely to be met with even higher yields driven by rising breakeven rates.

Expectations sit at 5.3% for the headline reading in September, however, risks are tilted slightly to the upside given the recent price rises in energy and commodities.

It may be too soon for these price increases to fully filter into the headline reading, and even more so for second-round effects to impact the core measure which is projected to hold stable at 4%, but the risk remains nonetheless.

Any signs that inflation pressures are starting to cool is likely to be met with a sigh of relief from some corners of markets.

EUR

The euro moved all the way down to a fifteen-month low against the US dollar in yesterday’s session, and while yesterday’s data docket included a big miss in ZEW economic sentiment data, the lows were unrelated to the data as indicated by the timing of the moves.

Instead, it was moved from bond markets that ignited the fresh lows as the euro remains sensitive to changes in US yields given rate differentials between the US and eurozone.

Despite betting markets now pricing in a rate hike by the European Central Bank by December 2022, ECB members continue to highlight the subdued inflation outlook over the medium term.

After Chief Economist Philip Lane commented on the inflation outlook on Monday, Governing Council member Francois Villeroy de Galhau added yesterday that the outlook warrants continued monetary support, and the asset purchase programme (APP) could benefit from more dexterity as inflation is still likely to fall short of the 2% target in the medium term.

As the ECB focuses firmly on keeping financing conditions favourable, a new programme to complement APP or significant changes to APP past March 2022, when the pandemic purchases expire, is likely.

GBP

Sterling starts this morning’s session 0.18% higher against the US dollar as it looks to post gains over the course of the session for the first time in four trading days. After multiple false starts, GBP traders are beginning to wonder what needs to change for the pound to close the day out higher.

Hawkish Bank of England pricing has recently weighed on the pound as interest rate hikes are now expected to come at a time where the macroeconomic backdrop is weak, while even some positive notes in yesterday’s labour market data failed to help the pound consolidate early gains.

This morning, with the US dollar trading on the back foot and global back-end yields seemingly tumbling, it looks like today may be GBP’s best shot of closing the session out in the green. The rally comes amid growth data that has undershot expectations for August with a 0.4% MoM print coming just 10bps shy of expectations.

Economic growth has now undershot the Bank of England’s 2.1% QoQ forecast for Q3, with just September’s reading to go. This highlights the sluggish activity conditions behind the inflationary overshoot, which may cool concerns among policymakers and reduce the possibility of imminent rate hikes.