Fed Chair’s speech keenly awaited

There is a lot of talk around the markets about the timing and pace of interest rate normalisation around the globe. The spotlight at the moment is on the virtual meeting between central banks which would normally physically happen in Jackson Hole, Wyoming. The Chairman of the US Federal Reserve, Jerome Powell is due to speak today and the general expectation is that he will suggest the Fed is moving towards higher interest rates in 2022 and, as mentioned earlier in the week, the Fed will join in with the US Treasury is reducing the liquidity in the financial markets this year.

Comparative monetary policy rate plans driving USD and others

The juxtaposition between that and the real possibility that the European Central Bank will add liquidity this year is an interesting one. Logically, that should see the US Dollar strengthen and the Euro weaken. EURUSD rate shifted direction yesterday, having bottomed out around $1.1740 and it starts Friday at $1.1770. That isn’t a big move but the mood in the markets would suggest that, unless Jerome Powell changes the script, this trend should continue.

As the Bank of England is nearer to a rate hike than the ECB, there is every chance the Pound will make gains against the Euro too. We are not seeing that at the moment though. GBPEUR is down to €1.1640 this morning; above the €1.1600 support but getting close to testing that level. This is a great opportunity for Euro sellers. The Pound’s problems aren’t central bank driven. The supply chain problems caused by Brexit ad partly by covid are impacting many aspects of the retail and manufacturing sectors in the UK. I am sure I don’t need to tell our corporate clients anything about that.

Disappointing US GDP stalls USD

Sterling is holding up against the US Dollar though. Having dipped to $1.36 at the start of the week, GBPUSD spiked to $1.3760 yesterday after US GDP data showed 6.6% growth in Q2; a tad softer than forecast. GBPUSD is still holding station at $1.3700 this morning. The momentum indicators suggest upward movement, but Chairman Powell may be the fly in the ointment that stops the uptrend in its tracks.

Unsurprisingly, Aussie retail sales down 2.7%

In overnight news, Australian retail sales contracted 2.7% in July. No surprise there when many parts of Australia are unable to get to the shops but the drop was a little worse than expected. The GBPAUD rate has been trading in a very flat pattern for the last three days and sits at an uneasy looking AUD 1.89 this morning. There are buyers for the Pound below this level, so it may form the base camp before the Pound regains lost ground. However, if this pair drops to AUD 1.88, the pattern will have changed and further losses would be likely.

And the UK has a public holiday on Monday, so many of those who need to trade before the end of the month will be doing so today; especially those with ‘next-day’ currencies like the AUD, NZD and the Asian currencies. So this may be a super busy Friday for the UK markets.

The Halo Team will be back at our desks…well virtual desks at least… on Tuesday. In the meantime, the foreign exchange market will carry on without us but, as the UK accounts for 40% of forex trade, the illiquid markets may well be volatile. That will prompt a lot of risk-averse traders to pre-emptively cover their risks. So tin hats on and over the top we go for a very busy day.

Have a great weekend everyone.

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