05.01.23: Energy Prices and US Jobs Data Set to Drive Near-Term Sterling and Euro Moves against the Dollar
Monetary policies will remain an important underlying element for currency markets.
Central banks want to remain focussed on inflation and reiterate the need for further interest rate hikes to bring inflation under control.
Markets, however, be looking to assess the 2023 outlook and the decline in energy prices will spark further speculation that central banks will not need to or be able to maintain very aggressive policies as headline inflation declines.
If energy prices decline further, markets will be increasingly sceptical that central bank rhetoric is realistic or sustainable.
Trends in the Chinese economy will also be important with China looking to prioritise growth and push through the surge in coronavirus infections.
If optimism over the Chinese outlook prevails, risk appetite will tend to hold firm which will curb dollar support and underpin risk-orientated currencies.
If, however, it appears that Beijing has lost control, risk appetite would be likely to stumble.
In the near term, the latest US employment data will be important for underlying currency moves.
The Pound to Dollar (GBP/USD) exchange rate posted gains in early Europe on Wednesday with a move back above 1.2000 and managed to hold above this level, but there was no challenge on the 1.2100 level and GBP/USD dipped back to 1.2000 on Thursday.
Overall risk appetite held firm and lower energy prices will also be a positive element for the UK.
Lower prices will ease inflation pressures and will also lessen the cost to the government of support measures to cap retail and business energy prices.
Confidence in the UK economy will remain very fragile in the short term, especially given the on-going wave of strikes, limiting net Sterling demand. At this stage, however, risk trends will continue to play the major role.
Overall, GBP/USD will need favourable risk conditions and gains in equities to hold above 1.2000 and make headway.
The Euro was unable to make headway on Wednesday, but there was an important element of resilience during the day.
The Euro to Dollar (EUR/USD) exchange rate strengthened in early Europe and managed to find support below the 1.0600 level later in the day.
There was further net support from mild weather conditions across much of Europe which has helped trigger further selling pressure on gas prices. European gas prices posted 13-month lows during Wednesday.
Lower energy prices will help cushion the Euro-Zone economy in the short term and also protect the currency.
ING reiterated the importance of energy prices; “the sharp fall in natural gas is generating even further improvement in the euro’s terms of trade and is a euro positive.
The bank does see limited upside until key event risks have been surmounted such as Friday’s US jobs release and next Thursday’s US December CPI reading.
ING adds; “Expect EUR/USD to continue trading in a 1.0580-1.0640 range, though we would probably say the upside risks are greater given developments in the energy story and the re-rating underway of European equities.”
There were mixed US developments on Wednesday which created uncertainty.
The ISM manufacturing index declined to 48.4 for December from 49.0 the previous month and marginally below consensus forecasts. There was a further easing of supply-side pressures while the prices component retreated to 39.4 from 43.0 and the lowest reading since April 2020.
JOLTS data recorded a small decline in job openings to 10.46mn for November from a revised 10.51mn the previous month, but above market expectations of 10.0mn which suggested that the labour market was still firm
According to minutes from December’s Fed meeting, members welcomed the recent inflation data, but warned that it would take substantially more evidence of progress to be confident of a sustained downward path. There were also further uncompromising warnings that interest rates were unlikely to be cut in 2023.
There was, however, agreement that slowing rate hikes would allow the bank to assess inflation and employment developments.
The dollar to yen (USD/JPY) exchange rate posted a strong recovery to near 132.50.
Given the evidence of weaker inflation pressures, there is still important market scepticism that the Fed will be able to maintain such an aggressive stance and the US currency still struggled for wider support.
In the current environment, the dollar is unlikely to make much headway unless there is very strong jobs data.
There were further sharp yen moves during Wednesday with the currency posting sharp losses after the surge earlier in the week.
The Pound to Yen (GBP/JPY) exchange rate recovered strongly to highs at 160.00 before settling around 159.20.
The Pound to Australian dollar (GBP/AUD) exchange rate initially remained under pressure on Wednesday and posted 7-week lows just above 1.7500 before a recovery to 1.7650 as the Australian currency faded again as business confidence data remained weak.
The Canadian dollar was resilient despite a slide in oil prices with the Pound to Canadian dollar (GBP/CAD) exchange rate settling around 1.6250 and close to 1-month lows.
The Norwegian krone was undermined by the slide in oil prices with the Pound to Krone (GBP/NOK) exchange rate jumping to 3-week highs around 12.15.
The latest US ADP data on private payrolls will be released on Thursday with expectations of an increase of around 150,000.
Reaction is likely to be muted unless there is a much weaker than expected figure, especially with confidence in the data’s accuracy still fragile.
Trends in energy prices will be important for underlying moves in currency markets with Chinese developments also very significant.
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Tim Clayton
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Daily FX 05.01.23: Energy Prices And US Jobs Data Set To Drive Pound Vs Euro, Dollar – Exchange Rates UK
