Global risk aversion continues to drive the US dollar
Monday 4 July, 2022
Daily Currency UpdateEconomic data in the UK hasn't been the most optimistic in the last few months which has put pressure on the pound. A recent survey from the British Chambers of Commerce (BCC) mentioned that 54% of more than 5,700 companies it surveyed between May 16 and June 9 expected turnover to increase over the next 12 months. This is down from 63% in the previous survey and the lowest share since late 2020 when many businesses were under some form of COVID restrictions. Businesses are currently struggling with exponentially increasing costs in their supply chain, as well as a rise in energy costs, which is squeezing profit margins. This coupled with a reduction in spending from the average consumer is a double-edged sword for UK businesses and keeps the pound subdued for now.
Political matters carry on clouding over the pound as Boris Johnson arrived back in the UK this morning. We are expecting a statement in the Commons this afternoon from him. After losing two bi-elections, the chairman of his party resigning, and now having to give answers as to Chris Pincher's behaviour which is being investigated, there are renewed concerns around Johnson's viability as prime minister. Political uncertainty in the UK generally tends to be negative for the pound and so it’s another reason for pressure on the currency.
Key MoversThe US dollar ended the week very strong against its peers after risk aversion returned to the market. Increased Brexit tensions between the UK and the EU, as well as further news about Russia and Ukraine (with Ukraine withdrawing from the city of Lysychansk, which is the last Ukrainian stronghold in the eastern Luhansk province) has resulted in the market focusing on assets that perform well during times of global risk aversion. The US dollar is one of these. There are also fresh COVID-19 concerns from China’s Anhui province.
This week the market prepares for key data and events including the minutes from the last US Federal Reserve meeting, which will display the detailed rationale behind announcing the 75 basis point interest rate hike made. Apart from that, the US non-farm payrolls is often a figure in focus. A preliminary estimate for job additions in June is 250k, extremely lower than the former additions of 390k in May, and it raises some concerns about how robust the US economy is during a time when its central bank is looking to increase its interest rates aggressively.
HICP (a measure of inflation) in the Eurozone has been in focus and reported at 8.6%, higher than estimates and the prior print of 8.4% and 8.1%. Similar to the inflation rate in the US economy, we are seeing inflation track continuously higher in the Eurozone and the European Central bank is yet to act. In the last two weeks, the feeling in the market is that there could be a significant move from the European Central Bank with a potential rate hike announcement from Cristine Lagarde. We have seen a more hawkish approach in recent meetings compared to their historical stance of being relatively slow with rate hikes, and thus the euro could benefit in the coming weeks if this materialises into aggressive rate hikes.
- GBP/USD: 1.1980 - 1.2165 ▼
- GBP/EUR: 1.1545 - 1.1670 ▲
- GBP/AUD: 1.7510 - 1.7765 ▲
- EUR/USD: 1.0380 - 1.0545 ▼