USD, EUR, JPY & GBP – All You Need to Know

USD

Looking beyond the dollar overshoot.

Increased oil prices and rising real yields likely had a stronger impact on the dollar due to positive month-end flows. This could result in the dollar overshooting from what I consider to be fair levels, around 1.08 in EURUSD. There is still a possibility of another upward move in the dollar, which is considered a tail risk. However, there is also potential for short-term relief soon. This relief could be driven by positive developments in China's economic data and a slowdown in US economic growth.

Key data releases for the week include the Sep ISM manufacturing report on that we had this night, yet the manufacturing came higher than expected JOLTS data on Tuesday, ADP employment figures on Wednesday, ISM services data also on Wednesday, and the highly anticipated NFP (Non-Farm Payrolls) report on Friday. Please note that these releases are subject to confirmation and may change. Additionally, there are several Federal Reserve speakers scheduled to address various topics throughout the week, including Chair Powell.

EUR

Facing persistent headwinds.

The ongoing struggle between opposing forces is adversely affecting the euro. On one side, there are the tailwinds of a strengthening US economy and a slowing global economy. On the other side, we have concerns about China's economic outlook and a Federal Reserve during a mature tightening cycle. These dynamics are working against the euro.

The European Central Bank (ECB) adopted a dovish stance, followed by a more hawkish stance by the Federal Reserve, combined with resilient US economic data. Additionally, rising energy prices, a significant increase in US real term premia, and robust month-end USD demand have all contributed to the euro losing further ground.

However, there are positive signs emerging in China's economic data, which could start to be evident in the fourth-quarter data releases. This might help shift the narrative in a more favourable direction for the euro. Moreover, as we move into the fourth quarter, the US may experience a slowdown due to the drawdown of excess savings, a gradual cooling of the labour market, and more deflationary pressures than initially apparent. These factors suggest that there are limits to the downside potential for the euro.

In terms of data to watch for this week, the final PMI figures are notable, along with speeches from Chief Economist Lane on Tuesday and President Lagarde on Wednesday.

JPY

FX intervention risks keep USDJPY below 150.

The risk of foreign exchange (FX) intervention in Japan remains notably high. In the previous week, USDJPY consistently reached new year-to-date highs; however, it remained below the 150 thresholds, as authorities continued to engage in verbal intervention efforts.

On Friday, the Bank of Japan (BoJ) took an unscheduled action by initiating a bond-purchase operation to curb the rising momentum in Japanese Government Bond (JGB) yields.

In this week, it is anticipated that the BoJ's quarterly business sentiment index, known as Tankan DI, will maintain a mostly steady level, remaining elevated compared to the figures reported in June. Additionally, there are expectations for a notable increase in nominal wages per worker (cash earnings) for August, with a projected year-on-year growth of +2.2% in August, compared to the +1.3% reported in July.

GBP

Dovish BOE crystallizes risks for the pound.

The recent decision by the Monetary Policy Committee (MPC) to keep interest rates unchanged reflects a notable shift in the outlook for the British pound. Despite a close vote (5-4) and significant uncertainty surrounding economic data, increasing signs of weakened demand and a cooling labour market have made the Bank of England's hesitance to raise rates substantially more credible than in the past.

While persistent wage growth and inflation suggest ongoing support for interest rate differentials, the case for the pound to outperform has diminished. Our projections anticipate that the pound will likely remain within a relatively narrow range against both the euro and the US dollar in the upcoming quarters. There is a slight bias towards the downside in the risks associated with these forecasts.

This week, it will be important to keep an eye on the final PMI figures, results from the DMP survey on Thursday, and speeches from MPC members Broadbent on Thursday for further insights into the evolving economic landscape.

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