FX Daily: Lots At Stake This Week

From a potential decision on the Fed chair, to Biden-Xi call today and geopolitical developments in Belarus, it should be quite an eventful week for global markets. In the US a quieter data flow should still help cement hawkish Fed bets and keep driving EUR/USD lower. GBP, still reluctant to price in any political risk, may rise on good jobs and inflation data. 

Pixabay

USD: Plenty of drivers, but Fed narrative can offer more support

The week has started with the dollar being slightly offered across the board. China’s industrial output and retail sales decelerated by less than expected in October, partly easing growing concerns about the country’s economic outlook.

Despite this morning’s moves, the dollar approaches this new week with quite a lot of tailwind after another big jump in inflation fueled speculation that the Fed may have to move faster and more aggressively on policy normalization (i.e. accelerating tapering to end QE in 1Q22) and tightening (the first hike is now priced in for July 2022). The US data calendar this week is rather quiet, with October’s retail sales and industrial production reports being the main stand-outs. Our economist expects both releases to be quite strong and to support the case for a more hawkish Fed.

Markets will also weigh the first comments by Fed officials after the October CPI report. This week’s Fedspeak calendar includes Williams, Bostic, Evans and Clarida. Developments on the Fed Chair nomination are also expected in the coming days, with Biden set to announce whether Powell will retain the seat or will be replaced by Lael Brainard. Brainard has been one of the most dovish voices in the FOMC recently, and we do see some moderate downside risks for the dollar if she secures the role. Powell’s confirmation should instead have either a neutral or mildly positive impact on the dollar (UUP).

Geopolitical themes are also set to be in focus this week, with sensitive assets set to remain driven by developments in Belarus – and the potential impact on gas supply to the EU – as well as any headlines emerging from today’s call between Biden and Xi Jinping.

All in all, we don’t see a clear catalyst to drive a material correction in the dollar this week, and expect the greenback to remain broadly supported thanks to the ongoing narrative of a more hawkish Fed. Today’s US Empire manufacturing index is expected to rise, although other factors (geopolitical, global risk appetite) should be the primary drivers in FX.

EUR: On a slippery slope to 1.13?

Last week saw EUR/USD break below 1.1500, and we think there is now room for the pair to decline to the 1.1300 level by the end of November. The eurozone data calendar is quite dull this week, and the focus will mostly be on ECB President Lagarde’s remarks. Today, Lagarde will meet with the EU ECON committee in a very inflation-centered debate, and she is also set to participate in other events later in the week – expect remarks by Lane, Schnabel and Weidmann as well. We do not expect to hear any change in her cautious view on inflation and her policy-related comments should still be aimed at pushing back against any speculation of a 2022 rate hike. This should allow markets to retain a broadly bearish bias on the euro (FXE) this week, in our view.

GBP: Choosing data over politics

EUR/GBP has been oscillating around the 0.8550 level in the past few days, as markets awaited news on Brexit – the British government is still expected to use Article 16 of the NIP soon – and some key data releases this week. Tomorrow, we’ll see the UK’s jobs report and our economist expects to see no spike in unemployment despite the end of the furlough scheme. On Wednesday, CPI numbers should show inflation accelerating again (we think to 3.8%) in October. The combination of these two releases should make markets (and we think also the BoE) more comfortable with a December rate hike call. We see the balance of risks tilted to the downside in EUR/GBP in the near term, with room for a move below 0.8500.

The FX market has still been quite reluctant to price in any Brexit-related risk premium on GBP, despite multiple indications that the EU is planning to retaliate should the UK suspend parts of the NIP. Our moderately bullish bias on GBP (FXB) for the remainder of the year is tied to the view that markets will continue to steer away from embedding much political risk into GBP. This may also be the case when it comes to other recent political developments in the UK as Boris Johnson’s role as prime minister appears increasingly at risk following a political scandal and opinion polls showing his party has lost a good deal of support recently.  

SEK: Moderate rise in inflation unlikely to change the Riksbank’s tone

Sweden’s inflation numbers for October are released this morning, and consensus is looking at a moderate increase in the headline rate from 2.5% to 2.7%. The Riksbank’s preferred measure, CPIF, is expected to increase from 2.8% to 3.0% YoY.

SEK (FXS) has performed poorly so far in November, and EUR/SEK is back above the 10.00 level after touching 9.8900 lows at the end of October. Given the recent tendency of inflation reads to surprise to the upside in developed economies, we would not be surprised to see a strong read today and SEK receiving some short-term support. Still, we remain of the view that – barring a very significant spike in core inflation today – the Riksbank will turn more hawkish at the 25 November meeting. We are inclined to think policymakers will opt to keep the rate projection path flat at 0.00% through 2024 in an attempt to push back against the market’s well-cemented expectations for a first hike already in 2022.

We except to see EUR/SEK above 10.00 at the end of November, while seasonality trends we could see it edge below that level (we expect 9.95) at the end of December.