ACM Update 11-07-22
Captivating. Confrontational. Ridiculous. Unpredictable. Yes, Nick Kyrgios. Not the last week in UK politics.
EUR/USD is trading just over 1.01. Let’s put that into context. A year ago, we were trading at 1.19. That’s a 15% fall in the currency pair. You need to think back to 2002 and Gareth Gates and Will Young for the last time we were at these levels. For parity you need to go back to 1999. Largely, it is a Dollar strength story although the outlook for the Euro continues to be bearish. Why? Germany and energy prices. Germany has recorded its first trade deficit in 30 years with a 1 billion EUR deficit. In May the surplus was over 13 billion EUR so the impact of the Russian invasion into Ukraine is stark for Germany and indeed the Eurozone. EUR/USD will likely trade below parity soon as the Dollar benefits from haven status. As the Russian/Ukraine war continues, investors move to the Dollar and the Euro keeps the downside momentum. How far does it go once it breaks this key psychological and support level? That is open to some debate.
You can view movements over the last ten months in EUR/USD in the graph below –
I see the EUR winning first prize in the ugly parade for the rest of the summer. The inaction of the ECB in raising rates (the disparity between the Federal Reserve and the ECB has aided the fall in EUR/USD) will now cause headaches as they’ll be raising rates into an economy with low growth and potentially a recession inbound. This will likely cause pain for Sovereign bond yields in the more indebted nations of the Eurozone (southern economies). This week, Germany’s main gas pipeline, Nord Stream 1, is undergoing maintenance. This will give Russia an even stronger hand in pushing the energy crisis in Europe into further turmoil.
If you have a EUR/USD exposure and would like a conversation with one of the team at Aston please let me know.
- GBP trades around two-year lows as markets turn to a risk off mood again
- UK political developments will create a lot of noise this week although unlikely to impact GBP short-term. Once further along the internal election process GBP will come back into focus
- We had NFP (Non-Farm payroll) figures released Friday with an additional 372K jobs added. This should keep the Federal Reserve on track for another 75bps hike and continue the Dollar strength story
- US Retail Sales (MoM) (Jun) are released Friday with a print of 0.8% expected against a previous print of -0.3%
You can view the recent movements in the graph below –
- Slight bias to the upside for GBP/EUR. However, any major moves may be limited
- Bank of England Governor Bailey is speaking tomorrow
- Fiscal policy and a more hawkish Bank of England will be the key catalysts for any sustained upside in GBP
- Harmonized index of Consumer Prices (YoY) (Jun) released from Germany tomorrow (expected print of 8.2%)
Have a fantastic week