Currency Market Analysis

Sep 29, 2021 | Currency Market Analysis

Global Themes

EUR

Accelerating vaccination rates across Europe has lifted European social mobility and improved economic activity to beyond pre-pandemic levels. However, the euro is sagging at fresh 2021 lows versus the dollar. GBP/EUR has slipped over 1-cent this week though as consumer confidence from the bloc drops in later this morning alongside business sentiment indicators.

The strength of consumer confidence across Europe has helped the economic recovery pick up pace despite ongoing supply chain pressures and rising prices across the continent. Covid-19 infections in the Eurozone continue to fall and flights have stabilised since the summer peak, indicating the tourism boost might be sustained for a while longer. The euro is in a spot of bother though as the turmoil across bond markets this week has sent shockwaves through FX markets as investor clamber for dollars.

Key support is at the $1.16 handle for EUR/USD, where the 200-week moving average is located. A break south of this mark could open the trapdoor to $1.14. Europe’s energy crisis, China’s Evergrande story and US debt ceiling concerns continue to depress risk appetite. 

GBP

The British pound plunged to a 9-month low versus the US dollar yesterday and a 2-month low versus the euro. GBP/USD fell circa 1.25% - its biggest 1-day fall of 2021 as volatility in bond markets, sent equity indices tumbling. Risk aversion dominated and shattered GBP demand. Ongoing supply chain constraints, namely the ripple effects from the current fuel crisis, also contributed to the pound’s demise.

Broader market dynamics suggest the recent rotation out of riskier assets can be explained by rising yields coupled with profit taking given that stretched tech stocks are falling, whilst bank stocks climb. Soaring energy prices and labour shortages are also increasing fears of a slowdown in the global economic recovery as ongoing supply chain constraints have forced industries to cut production, even in China where as much as 44% of its industrial activity has been impacted. Meanwhile, the shortage of truck drivers in the UK has prompted the government to issue 5,000 temporary visas for EU truck drivers since the free movement of labour ended after leaving the bloc at the start of the year.

Although Bank of England Governor Andrew Bailey reiterated rates could rise early next year and even as soon as this year, which offered brief support to GBP, the selling pressure gathered speed as investors worried that tightening monetary policy would not soothe supply shocks or thus tame inflation but it will raise the UK's huge debt-servicing costs. This makes the pound less attractive given the UK's, budget, current account and trade deficits.

USD

Yields and commodities are soaring, rattling financial markets and creating a risk-off environment. The dumping of government bonds and surging commodity and in particular energy prices has triggered short-term USD demand as investors bring forward US rate hike bets. Risk aversion swept through financial markets yesterday, hurting most stock indices, and risk-sensitive currencies.

US 10-year Treasury yields surged to 3-month highs, whilst UK 10-year gilt yields rose above 1% for the first time since March last year. Usually this might strengthen the pound, but with commodity prices accelerating higher - oil at 3-year highs and coal, carbon and European gas at record highs - the current inflation spike is expected to last longer that previously predicted. Tightening monetary policy whilst the credit impulse contracts and the economic recovery appears to be slowing, is being viewed as a potentially damaging scenario to the growth outlook, Sectors such as banks are benefiting from higher yields, but tech stocks have been crushed, dragging down stock indexes where the sector has an outsize weighting. For example, the US S&P 500 and Nasdaq 100, both falling over 2% yesterday, are on track for their worst monthly performances in a year.

Meanwhile, investors are also bracing for another potential payment deadline miss by China’s cash-strapped property developer, Evergrande.


Get the daily currency market analysis in your Inbox

Published five days a week, this newsletter provides day-to-day trends and activities affecting the market in easy-to-understand snapshots.