24.03.23: Global Business Confidence Data will Drive Near-Term Euro and Sterling Moves against the Dollar
The relative outlook for global economies and the central bank stances on interest rates will remain very important for global currencies.
In this context, the round of PMI business confidence data on Friday will be important with releases for the US, UK and Euro-Zone.
Consensus forecasts are for little net change from February with manufacturing remaining in recession.
Currencies will tend to out-perform if the data suggests out-performance while weak data would risk net selling, especially as poor data would reinforce expectations of peak interest rates.
The other major element will be a further battle in global markets between yield trends and banking-sector fears.
Lower yields will tend to sap dollar support, especially if global risk appetite strengthens, on hopes for a peak in Fed rates.
The decline in yields has, however, also been influenced to an important extent by unease over the banking sector.
If lower yields are driven by optimism that inflation has peaked, risk appetite will tend to strengthen, undermining dollar support.
If, however, lower yields are driven by fears over the banking sector, risk appetite will be more vulnerable which would support the dollar and especially the yen.
Pound US Dollar Exchange Rate Outlook
The Bank of England increased interest rates by 25 basis points to 4.25% which was in line with consensus forecasts.
There was no clear forward guidance from the bank, but with suggestions that rates were close to a peak. Governor Bailey declined to comment whether rates had peaked.
Sterling gained an element of support from an upward revision to the second-quarter economic outlook and a more optimistic assessment of the outlook.
Given a scaling back of pessimism surrounding the UK outlook, there is scope for a further unwinding of structural short Sterling positions which will tend to underpin the currency, especially if data is stronger than expected.
On a near-term view, the overall business confidence data will be important in driving near-term confidence in the economy and Pound.
Risk conditions will also have a significant impact on the Pound with net vulnerability if equities decline.
Overall, there is scope for tentative GBP/USD gains if the PMI data is better than February’s release.
Euro (EUR) Exchange Rates Today
There were no significant Euro-Zone data releases on Thursday.
The Euro to dollar (EUR/USD) exchange rate was unable to make further headway, especially with reservations surrounding the financial sector, and retreated to 1.0830 on Friday.
The Euro will continue to gain an element of support from expectations that the ECB will be the most aggressive global central bank in raising interest rates over the next few months.
The Euro will, however, be vulnerable if there is important evidence that the financial sector is under pressure.
Overall, unless there is very weak Euro-Zone data, there should be solid Euro support on dips with scope for a tentative net EUR/USD advance.
US Dollar (USD) Exchange Rates Outlook
There has been a further decline in US yields during the past 24 hours with the 10-year yield, for example, close to 6-month lows around 3.40%.
There was further speculation that the Federal Reserve would take a less aggressive stance on interest rates due to reservations surrounding the banking sector.
Lower yields sapped support for the US currency, but there was also an element of defensive support for the US currency as the regional banking-sector stocks came under renewed pressure.
The reassurance efforts by Treasury Secretary Yellen continued with further efforts to guarantee all deposits, but confidence remained very fragile.
Overall, the dollar was able to secure limited defensive demand against European currencies.
The main beneficiary was the yen with the dollar to yen (USD/JPY) exchange rate sliding towards 130.00 before a tentative recovery.
HSBC notes the discrepancy between Fed and market expectations; “The Fed does not foresee policy easing this year, while markets are contemplating cuts.
It adds; “Resolution of this gap between the markets and the Fed will hinge not just on the data but also on banking sector developments. Until there is clarity, the USD may remain trapped yet choppy, albeit at a weaker level than before this March FOMC meeting.”
According to HSBC; “Ultimately, we expect the USD to resume its weakening trend.”
Other Currencies
The Swiss National Bank increased interest rates by a further 50 basis points to 1.50% at the quarterly meeting and warn that further hikes may be needed.
There was only a limited impact and the Pound to Swiss franc (GBP/CHF) exchange rate settled around 1.1260.
The Norwegian Norges Bank increased rates by 25 basis points to 3.00% and also expects further increases with a higher peak.
The krone recovered some ground with the Pound to krone (GBP/NOK) exchange rate edging lower to around 12.76 from 35-month highs above 13.10 earlier in the week.
The yen has regained some ground over the past 24 hours with fragile confidence in the banking sector and expectations of Bank of Japan tightening.
The Pound to yen (GBP/JPY) exchange rate hit selling interest around 161.80 and retreated to lows around 159.80.
The Australian dollar as hampered by unease surrounding the global banking sector.
The Pound t Australian dollar (GBP/AUD) exchange rate briefly hit 12-month highs just above 1.8420 before a retreat to 1.8360.
The Pound to Canadian dollar (GBP/CAD) exchange rate also posted 12-month highs just above 1.6860 before settling just below 1.6850.
The Day Ahead
The PMI business confidence data will be watched closely on Friday. Weaker than expected data, especially for the US, would trigger fresh reservations surrounding the US and global economic outlooks.
Central banks and markets will also be monitoring the inflation evidence within the data.
There will still be important reservations surrounding the regional US banking sector which will have an important impact on overall risk conditions.
In this context, trends in equities will continue to have an important impact on exchange rates.
Commentary from the US Treasury and global central bank speakers will be watched closely.