6.9.22: Fiscal Policy Announcements Vital for Underlying Euro and Pound Moves against the Dollar
The US Labor day holiday tends to be seen as an important marker for the financial calendar as it marks the end of the Summer holiday trading period in the US and Europe.
Investment banks tend to take stock of underlying trends and strategies. Markets will, therefore, be monitoring underlying capital flows in the short term.
At this stage, markets are expecting the Federal Reserve to maintain a hawkish stance with further increases in interest rates. Fed rhetoric will, therefore, be watched very closely.
The narrative of a European energy crisis will remain a crucial element in the short term with governments under intense pressure to take further action to provide support.
Fiscal policy trends in Europe will be very important in determining whether there is a net change in sentiment towards European currencies.
Pound US Dollar Exchange Rate Outlook
Overall confidence in the UK economy remains notably weak with further fears over a slide into deep recession.
The Pound to Dollar (GBP/USD) exchange rate did, find support below 1.1450 and managed to regain the 1.1500 level.
Truss was confirmed as winning the Conservative Party leadership contest and will take office as Prime Minister on Tuesday.
The latest hints suggest that the government will announce a major support package of over £100bn to ease the energy crisis with a move to freezing energy prices appearing to gain traction.
Such a plan would ease short-term fears over the economy.
Methodology would also be important, but there should be an important impact in capping inflation, limiting the scope for an inflation cycle.
The Bank of England would still be uneasy over the implications of a major fiscal policy boost.
The energy plan could trigger a significant re-assessment of the UK outlook and GBP/USD rallied further to 1.1580 on Tuesday.
Overall risk conditions will also be important for underlying Sterling trends with scope for a further net rally ahead of expectations of a major fiscal package.
Euro (EUR) Exchange Rates Today
The Euro to Dollar (EUR/USD) exchange rate managed to regain some ground on Monday with a further limited net advance to around 0.9960 on Tuesday.
Overall confidence in the Euro-Zone outlook remains very weak with notable fears surrounding energy costs.
Gas prices increased sharply on Monday with the weaponising of energy supplies continuing as Gazprom stated that it would not re-start flows through the Nord-Stream pipeline until Siemens repairs faulty turbines.
There has, however, been some reluctance to sell the Euro further ahead of Thursday’s ECB policy meeting and the Euro also secured some respite n a corrective move.
Fiscal policy will be watched closely with major pressure for additional support to cushion the economy from the surge in gas prices.
There will also be further caution ahead of Thursday’s ECB policy decision.
Commerzbank considers that the ECB will have to deliver this week in order for EUR/USD to hold near parity.”
According to the bank; “In addition to the extent of an interest rate hike, it will probably be important whether it signals that it will stick to an aggressive rate hike pace even in view of the current economic risks.”
It added; “Any hesitation is likely to be quickly punished by the market with euro weakness.”
US Dollar (USD) Exchange Rates Outlook
US markets were closed for the Labor Day holiday on Monday which had a significant impact in undermining activity.
The yen remained very vulnerable on yield grounds and the Dollar to Yen (USD/JPY) exchange rate posted a further notable gain to fresh 24-year highs just below the 141.00 level.
After strong gains, the dollar also corrected slightly against European currencies as sentiment in Europe attempted to stabilise after heavy losses.
The dollar can correct slightly further against European currencies. Expectations of a hawkish Federal Reserve policy will, however, continue to provide net support to the US currency and will tend to limit the scope for dollar losses.
Other Currencies
The Reserve Bank of Australia increased interest rates by 50 basis points to 2.35% which was in line with market expectations and the overall market reaction was limited with no major changes to forward guidance.
The Pound to Australian dollar (GBP/AUD) exchange rate rallied from 4-year lows around 1.6875 to trade just above 1.7000.
After sustained pressure, Sterling has managed to rally in global markets with hopes for a major fiscal support package to combat the surge in energy prices.
The Pound to Canadian dollar (GBP/CAD) exchange rate also rallied from 12-year lows near 1.5050 to trade just below 1.5200.
The Pound to New Zealand dollar (GBP/NZD) exchange rate also advanced to around 1.8975.
The yen remained firmly on the defensive amid a lack of yield support with the Pound to Yen (GBP/JPY) exchange rate advancing to 2-week highs around 163.25.
The Day Ahead
The latest US ISM business confidence data for the services sector will be released on Tuesday.
The data will be important given that the equivalent PMI data indicated notable weakness within the non-manufacturing sector.