5.10.22: Wall Street Reaction to US Jobs Data Crucial for Pound and Euro Moves against the Dollar
The mood in global markets was again much more positive on Tuesday with strong gains in equities.
Although the Federal Reserve rhetoric has remained hawkish, the weaker than expected US data has increased speculation that inflation pressure are starting to subside and this will allow the Fed to be less aggressive in hiking interest rates.
The smaller than expected Reserve Bank of Australia rate hike also triggered speculation that banks could be less aggressive.
Sentiment will remain stronger in the very short term, especially with markets forward-looking, but the mood will sour again if the next batch of US data suggests that inflation pressures remain strong, especially in the services sector.
Pound US Dollar Exchange Rate Outlook
The Pound to Dollar (GBP/USD) exchange rate posted further strong gains on Tuesday with a 20-day high just below the 1.1500 level before a correction to 1.1450.
There were still very important reservations surrounding the UK outlook, especially with further uncertainty whether the medium-term fiscal plan will be brought forward from November 23rd.
The government also remains in disarray over economic policy with open splits.
The global environment, however, was completely different from last week with strong risk appetite and substantial gains in equities.
In this environment, there was important protection for the Pound with a further covering of short positions.
Overall tensions surrounding domestic politics and economic policy will continue and potentially escalate if Prime Minister Truss is unable to inspire confidence while confidence in the UK fundamentals will remain very fragile.
The Pound will, therefore, need favourable global risk conditions to make further headway with the risk of a sharp setback if equities slide again, although a break above 1.1500 could trigger another round of short covering.
Euro (EUR) Exchange Rates Today
There were again no major Euro-Zone developments during Tuesday with global trends tending to dominate.
The stronger trend in risk appetite was again a key element in undermining the dollar which also boosted the Euro with short covering also kicking in as momentum gathered pace.
In this environment, the Euro to Dollar (EUR/USD) exchange rate posted a further net gain to 2-week highs just below the parity level.
Ukraine gains in their counter-offensive would provide an element of Euro support, although the Russian response will be monitored very closely.
A EUR/USD break above 1.0000 could trigger another round of short covering.
Commerzbank notes that Euro pessimism has eased to some extent; “It seems that the market is somewhat more optimistic that the Eurozone will weather the energy crisis this winter more smoothly than previously feared.”
The bank, however, is doubtful that the optimism is justified; “It remains highly uncertain to what extent the current energy crisis will continue to weigh on Europe’s economy in the longer term, which in my view justifies an increased risk premium on euro exchange rates for quite some time to come.”
US Dollar (USD) Exchange Rates Outlook
The latest US data on job openings recorded the sharpest monthly decline on record.
Given that the Federal Reserve considers that a cooling of the labour market is essential to curb inflation pressures, the data boosted confidence that the medicine is working.
In this context, there were expectations that the Fed would be able to adopt a less aggressive stance and limit further rate hikes even though rhetoric has remained hawkish.
In this environment, the dollar retreated as yields declined with strong gains in equities also curbing potential defensive demand for the US currency with the dollar index at 2-week lows.
The dollar will have scope to recover if the data is notably stronger than expected.
Risk appetite continued to recover strongly on Monday with sharp gains in global equities amid hopes that inflation pressures are peaking which will allow the Federal Reserve and global banks to take a less aggressive stance.
The yen struggled for support with the Pound to Yen (GBP/JPY) exchange rate advancing to 2-week highs around 165.40 before a retreat to 164.90.
The Pound to Swiss franc (GBP/CHF) exchange rate also posted 4-week highs around 1.1290 before a retreat to 1.1210.
The Reserve Bank of New Zealand (RBNZ) increased interest rates to 3.50% from 3.00% which was in line with consensus forecasts.
There was a hawkish RBNZ policy statement with expectations of further rate hikes.
The New Zealand dollar spiked higher,…