News & analysis

GBP

Sterling has largely managed to hand on to Monday’s rally against the dollar so far this week, but did see a small decay in those gains overnight while weakening further against the euro. A couple of data releases of note were released this morning, although none of them are of immediate significance for sterling. The British Retail Consortium’s price index fell 1.6% year on year, highlighting the pressure the sector is under. UK house prices surged in September, according to Nationwide, which reported a 0.9% increase on the month, or 5% year on year. Pent-up demand was mentioned as a major factor by the lender’s chief economist Robert Gardner, as well as the stamp study holiday. Revised gross domestic product data from the Office for National Statistics showed the UK economy falling 19.8% in the second quarter, compared to the previous three months. The figure is a slight improvement on previous estimates of 20.4%, and significantly better than the Bank of England’s expectations at the onset of the crisis. Bank of England Chief Economist Andy Haldane gave a speech this morning and joined a growing chorus of policymakers piping up about negative interest rates, saying that recent meeting minutes from the Bank did not signal the move was imminent, and that preparatory work on the measure was likely to take months.

EUR

The euro pared some of its gains against the dollar overnight as the dollar managed to catch a bid after the presidential debate, while headlines from the eurozone may have dampened the single currency’s rally from yesterday. Germany has followed in the footsteps of its Western neighbours and tightened virus containment measures by urgently recommending that state governments restrict at-home gatherings to 25 people and will limit public meetings to 50 people. Regarding the European Union’s €1.8tn budget, Germany also is in the spotlights as its government warned that the fund is in danger of being delayed due to disagreements over how to enforce adherence to democratic values. Adding fuel to the uncertainty, the European Commission is poised to release a critical report about the state of democracy in Hungary and Poland. EU diplomats met yesterday to try to reach a deal based on a proposal by Germany and will resume their meeting today. The French month-on-month Consumer Price Index printed at -0.5, below expectations and August’s release. The drop was smaller than the German CPI, as Germany’s VAT cuts carried out to help the German economy likely added downward pressure on the CPI figures. Italian inflation figures will be released at 10:00 BST and are expected to print at 0.9% month-on-month and -0.4% year-on-year.

USD

The dollar continued an indecisive week of price action yesterday and overnight. After weakening to the euro yesterday, the dollar managed to stabilise overnight, while against certainty currencies like GBP, NOK, and NZD the greenback has regained some of yesterday’s losses. Last night’s first Presidential debate was highly contentious, with incumbent Donald Trump and challenger Joe Biden trading barns on a variety of domestic topics such as the economy, law and order, and the coronavirus pandemic. Given the partisan tone of US politics and the high uncertainty surrounding any prediction of the electoral outcome, it seems futile to attempt to call a winner of the debate or infer anything about policy trajectory. However, betting odds showed Joe Biden enjoying a small increase in his market-implied probability of victory. This has coincided with the modest stabilisation in the dollar seen since the debate, although the size of the move, combined with the fact that most major pairs remain in familiar trading ranges, should be a caution against over-interpretation. Yesterday’s chorus of some 6-odd speakers from the US Federal Reserve passed largely without incident, given that many of the speakers were opining on a range of topics, and many were doing so for the second or third time in as many weeks. Today at 13:15 BST ADP’s estimate of official Non-farm Payrolls growth will be released, followed at 13:30 by the final reading of gross domestic product for the second quarter. Pending home sales will be out at 15:00.

CAD

It has been one-way traffic for the Canadian dollar over the last few weeks, with the loonie weakening some 2.66% since the beginning of September. Given the loonie’s recent bout of weakness, the USDCAD pair is now trading back above its pre-pandemic range. While much of CAD’s unwind was due to broad USD strength as global risk appetite deteriorated, the dollar has traded on the back foot this week. Instead, the impetus for the loonie’s recent slump now comes from oil markets with WTI slipping back below the $40 per barrel mark yet again as the demand outlook remains unclear. With the loonie’s focus now squarely on crude markets, today’s Department of Energy crude inventory release will draw even greater attention. Last week’s release saw inventories fall by 1.639m barrels, but expectations for this week’s release sit at a 456,000 barrel build. The API report, a precursor to the more market-moving DoE report released today, saw crude inventories fall by 831,000 barrels despite analysts expectations sitting at a build of 1.6m barrels. However, this has done little for a flailing oil market as at the same time, the API report highlighted a 1.623m build in gas inventories – a marker of weak demand at the pump for refined oil. That being said, should today’s DoE print contrary to expectations and signal a decline in inventories for both crude and refined oil products, WTI is likely to unwind much of today’s losses, leading to a potential reversal in the loonie’s weakness witnessed this morning. On the economic data front, today will see the release of July’s GDP data. The median expectation of polled economists sits at 2.9% MoM, just shy of the 3% preliminary reading released by Statistics Canada last week. With July and August expected to be the last two months of strong economic growth readings as the economy enters the recuperation phase thereafter, any slip in the GDP data is likely to pressurise the loonie into sustaining further losses, especially as the path of least resistance in USDCAD seems to be pointing higher at present.

 

 

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