Global FX: USD weakness, EUR strength and GBP hike bets.
USD: Hoping for some payrolls lovin’… or least signs of wage inflation. Betterwage growth data in today’s US jobs report may not change the market’s cautious outlook on the Fed. However, it could prove to be a saving grace for a beleaguered $ in need of some love from the US data. With the US 10-year yield at 2.2%, we would expect confirmation of a 0.3% MoM average hourly earnings print to see rates moving higher. It will be interesting to see if a steepening bias helps the USD to recouple with interest rate differentials, in particular those crosses where the decoupling has been notable.
EUR: Ain’t no stopping us now…Though we continue to view this as a near-term overshoot. Saying that, sentiment towards the euro has changed so much in recent months that it may not take much to break the psychological 1.20 level (even if bund yields are stable); the run-up to President’s Draghi Jackson Hole speech (end-Aug), rising QE taper speculation ahead of the ECB meetings in Sep and Oct and risks of a sustained slowing of the US economy are potential catalysts. The spillovers from the EUR rally are clear; we expect European FX (both within the G10 and EM space) to benefit vis-à-vis their USD-bloc peers.
GBP: £ vulnerable again as BoE said it best, when they said nothing at all In keeping with our Game of Thrones preview, the takeaway for markets from the Aug BoE meeting was “brace yourselves, winter is coming”. Admittedly, this statement is a light-hearted embellishment of the more tame reality. But relative to what markets had been expecting, the 6-2 MPC split vote – with no new rate hike dissenters – can be seen as a dovish disappointment, with some hoping for greater hawkish gestures from the Bank this week. The slightly more cautious growth projections, the dichotomy of MPC views and a lack of coherent policy bias mean the bar for a 2017 policy move still remains pretty high; we continue to see a credible BoE rate hike debate being more of a 2018 story. Although the immediate fallout for GBP has been contained, the BoE’s patient policy approach does now mean that GBP will be bucketed into those currencies at risk of being sold in the current theme of monetary policy divergence.