FX Trading focus: USD springs back on fresh EU energy woes
The US August employment report was a mixed bag, with payrolls slightly softer than expected if we include the -107k of net revisions of the prior two months of data, and the Average Hourly Earnings coming in softer despite a 0.1 drop in the Average Weekly Hours suggested no fresh inflationary pressure from wages. The official Unemployment Rate rising to 3.7% was misinterpreted, perhaps, as is often the case, with a strong Household survey actually showing that 442k more Americans were employed in the month, but the rate rose because of a 0.3% rise in the Participation Rate (suggesting more looking for work).
Alas, as US treasury yields eased lower in the wake of the US jobs report, risk sentiment was buoyant and the US dollar sold off rather sharply, until…Russia announced it had conveniently found a leak in the Nord Stream I pipeline that was purportedly down for a few days maintenance and saying that natural gas flows through that pipeline would not resume on Saturday as planned. Clearly this is the latest attempt to leverage gas deliveries as retaliation for EU countries’ support of Ukraine in its war against the Russian invasion. EURUSD and GBPUSD both traded to new lows this morning and may have a hard time finding a floor until either the Fed is back in easing mode or the energy situation clears in a sustainable fashion for Europe, neither of which looks likely in the near future.
Europe is scrambling to limit the damage from higher prices to sectors of the economy, but moves to cap prices will support demand more than would otherwise would be the case, and that will have to mean rationing of supply as long as the actual physical deliveries of gas/oil, etc. are limited. An EU summit in Brussels is set for Friday on energy policy. The UK situation is more dire still than that for mainland Europe because of its political isolation and its lack of a buffer after the country took the disastrous decision to close a key storage site called Rough in the North Sea in 2017. The UK is scrambling to reopen that site, but it will have to be filled with very expensive gas indeed, assuming any excess seaborne LNG can be locked down for delivery.
Today in the UK, the Conservative party has voted for Liz Truss as the new party leader, making her the UK’s next Prime Minister. Her promises range from quick action on energy security to alleviating the cost of living crisis for the hardest hit by price rises, all while cutting corporate and other taxes. It’s a recipe for ballooning fiscal deficits, an issue that is already an ingredient in sterling’s steep fall this year, so an even steeper recession is in the wings, either from a drop in real GDP due to soaring inflation aggravated by further sterling declines or as demand is crushed by a steep recession due to the need for the Bank of England to accelerate its pace of rate hikes or more likely a combination of the two. Longer term, investments in fracking shale gas and new North Sea exploration could pay dividends. Watching EURGBP closely in addition to the tumbling GBPUSD as the former has traded up into the top of the well established range since Brexit became formal in early 2021. Tactical relief rally possible.
EURUSD looked ready to test resistance after the US jobs report on Friday, but now finds itself having tested new lows for the cycle this morning, something it may continue to do as long as EU energy security woes continue to drive concerns for an ugly recession this winter amidst power/gas rationing. The EU summit this Friday is the key focus, far more than whether the ECB hikes 75 basis points as it nearly priced in now, with another 100+ basis points priced in before year end (implied rate for December meeting is 1.66%. Technically, the pair needs to set and hold these new lows near and below 0.9900 early this week, otherwise we risk backing up into the parity-plus range in the short term.