Market Strategist
Summary: Sterling was bruised by dovish comments from BOE Chief Economist Huw Pill, and any further downside surprises in economic data from here can open up room for market to price in rate cuts more aggressively, which will add to sterling’s headwinds. The plunge in crude oil prices weighed heavily on NOK, and inflation due on Friday could suggest that rate hike cycle has ended while Riksbank could still hike rates one last time this month.
Below is our ‘modified’ FX Board which indicates the momentum in different currencies and the direction and magnitude of the change in momentum in the last 2 days and the last 1 week.
GBPUSD pushed below the key 1.23 handle as BoE Chief Economist Huw Pill made a case for inflation slipping below 5% for the October print due next week and opening up the door for markets to price in more easing as he said that rate cuts from next summer looked reasonable. Recent polls have highlighted the steep cost-of-living crisis in the UK, with two-thirds of UK adults not looking to participate in Black Friday and Cyber Monday. This continues to deepen recession concerns for the UK economy, and threatens further downside for cable and other sterling crosses.
Speech from BOE Governor Bailey will be on watch today, but Fed Chair Powell could have a bigger focus. If he maintains a hawkish posturing, echoing what Kashkari said yesterday and keeps the door open for further tightening, then the Fed-BOE divergence will likely come into limelight. UK’s data docket is also full for Friday, with Q3 GDP particularly on watch. Consensus expects growth to slip into negative at -0.1% QoQ from 0.2% QoQ in Q2, which could signal the incoming technical recession. Market is currently only pricing in 50bps of rate cuts in the next one year, so dovish repricing risks could weigh on sterling in case data comes in weaker than expected.
Moreover, sterling has seen a significant correlation to US equities. The above table shows that GBPUSD has the highest positive correlation to S&P 500, more so than AUDUSD. If the Fedspeak weighs on equities, that could deal a double blow to sterling. GBPUSD could test 50% retracement level at 1.2232 ahead of 21DMA at 1.22 and EURGBP could head back higher towards 0.8750.
NOK was the clear underperformer on Tuesday, as it was rocked by Brent crude oil completely unwinding the war premium. EURNOK rose higher to get in close sight of the 12 handle, and higher US yields could bring a test of the big figure again.
EURNOK rose above the 12 handle in May-end but could not sustain the move. Over the last 1 month, NOK has underperformed all other G10 currencies by a wide margin both against the USD and EUR. Norges Bank held the policy rate at 4.25% last week and has maintained a data-dependent approach for December. Market is pricing close to 40% chance of a 25bps rate hike in December. If inflation (due to be reported on Friday) remains on a decline, that will increase the odds of interest rates staying on hold, further weighing on the krone. On the other hand, Sweden’s inflation due next week could still continue to show an uptick due to base effects, which keeps the case for a final rate hike from the Riksbank alive for November.
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