Forex Market Analysis

Oct 22, 2021 | Currency Market Analysis

Global Themes

Pound tumbles before key PMIs

• Pound dips after retails sales miss
• Watch out for PMIs
• Risk appetite fails to lift pound

Delivered by George Vessey

British pound

Pound dips after retails sales miss

Retail sales in the UK unexpectedly dropped 0.2% m/m in September and the British pound is sliding, albeit modestly, across the board. Meanwhile, the Bank of England’s (BoE) Chief Economist warns UK inflation could reach 5% and that the November monetary policy meeting is “live”.

Expectations were that retail sales would increase by 0.5%, but instead the UK saw a fifth consecutive monthly decline - the longest unbroken run of declining sales since the survey began in 1996. It was driven mostly by the nearly 10% fall in sales of household goods, which offset higher sales of fuel. UK consumer confidence data was also released - the index fell for a third month in a row to its lowest since February. Investors await PMI prints at 9:30am from the UK today, the Chancellor’s Budget update next week and the BoE’s rate decision the week after.

• The pound may depreciate further today but attention will be firmly on the upcoming big events to potentially determine its longer-term trends.

PMI

Watch out for PMIs

Today’s flash PMIs will offer early insights into economic conditions into the start of Q4 as supply chain constraints persist and commodity prices soar. The EUR and GBP may be sensitive to the data releases given they are leading indicators of overall economic activity - which is feared to be slowing.

With confidence waning amid rising COVID-19 related concerns, ongoing value chain disruptions and the energy market crunch increasing inflation fears, these PMI releases will offer timely economic updates. Manufacturers worldwide experienced near-record delays and increased price pressures in September so this month’s data will be scrutinised for updates on whether the situation has further worsened. A key gauge amongst the manufacturing PMI sub-indices is the suppliers' delivery times index, helping to offer clues on the supply situation.

• Although the pound may be more volatile throughout the day, it’s important to reflect its recent appreciation. This week, GBP/EUR has risen to levels last traded before the pandemic rattled markets in March 2020 and although GBP/USD is four cents below its post-pandemic high, it’s a massive twenty-four cents above its pandemic low.

GBP

Risk appetite fails to lift pound

Global risk appetite has improved over the past 24 hours following a surprise interest payment by property developer China Evergrande and a so-far-so-strong corporate earnings season. Equity indices are trending higher with Europe’s STOXX 50 hitting a 4-week high. Oil prices are dipping though with Brent on track to record its first weekly fall in seven.

The risk rally is reflected by the renewed flows out of the safe haven Japanese yen and into riskier currencies. Despite oil prices cooling, commodity-linked currencies remain elevated at multi-month highs, with the NOK and CAD still the best performing currencies year-to-date. Meanwhile, bond yields continue to rise globally as markets price in higher inflation and interest rates over the next few years but fear tightening monetary policy could undermine the global economic recovery, especially if new economic restrictions are put in place to curb rising COVID-19 cases.

• The risk-sensitive pound, which often positively correlates with improving risk appetite, has so far failed to capitalise on today’s risk rebound – falling 0.5% against the AUD but also 0.2% versus the JPY already this morning.


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