FX Daily: Central banks back in focus


DXY highest since 26 August
Philip Wee17 Sep 2021
    Photo credit: Unsplash Photo


    USD is underpinned ahead of FOMC meeting on 22 September. DXY closed at 92.9, its highest level since 26 August. The US 10-year treasury yield rebounded to 1.338% from 1.299% after US advance retail sales expanded by 0.7% MoM in August. Consensus had expected US consumers to pull back spending after the University of Michigan consumer sentiment survey fell to 70.3 in August from 81.2 in July. Today, the same survey is expected to show an improvement in sentiment to 72.0 in September, and an increase in 1-year inflation expectations to 4.7% from 4.6% in August. Over the past few weeks, investors worry that US economic activities might have levelled off with inflation from the Delta-variant. As things stand, the US recovery is intact and inflation is high, with the Fed on course to taper asset purchases before the end of 2021.

     

    GBP depreciated 0.3% to 1.3795 on Thursday despite higher UK inflation data. On Wednesday, the Office for National Statistics reported that UK CPI and core inflation surpassed 3% YoY in August, more than 1% above the 2% target. GBP was also weaker than the 1.3837 level posted on 9 September, the day Bank of England Governor Andrew Bailey reckoned the minimum criteria for tighter monetary policy had been met. Although the BOE is widely expected to adopt a hawkish tilt at its monetary policy meeting on 23 September, GBP bulls are also running up against Fed taper expectations at the FOMC meeting on 22 September. Unlike the Fed, the BOE will roll back QE only after it returns the policy rate from 0.10% to 0.50%, which the money markets now see taking place in 2H22 instead of 1H23. On balance, GBP is still range-bound this month between 1.3720 and 1.3910 into next week’s key policy meetings.

     

    EUR disappointed and fell below 1.18 again. EUR is weaker than 1.1825 level posted last Thursday, the day the European Central Bank announced a slower pace of net purchases under its pandemic emergency purchase programme. With the ECB seen behind the Fed and the BOE in pulling back pandemic stimulus, EUR is facing downward pressure against USD and GBP. The lows for the EUR this year were 1.1664 vs USD on 20 August, and 0.8450 against GBP on 10 August.

     

    AUD depreciated 0.6% to 0.7292 on a weak jobs report. Although Australia’s unemployment rate to 4.5% in August from 4.6% in July, the labour market shed 68k full-time jobs and 78.2k part-time jobs. The participation rate also fell to 65.2% from 66.0%. The weak jobs report was flagged by Reserve Bank of Australia Governor Philip Lowe. The RBA minutes on 21 September should also reaffirm the stance that rate hikes will be late in 2024. The year’s low for AUD was 0.71 on 20 August.








    Philip Wee

    Senior FX Strategist - G3 & Asia
    [email protected]


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