The Federal Reserve looks likely to cut interest rates this month...
..after August’s US employment report changed the picture for the short-term interest rate landscape. The Fed had previously been comfortable with the solidity of the US labour market, such that interest rates could be held to assess how inflation risks played out with Trump’s tariff policy. However, material revisions to jobs data mean the balance of risks has shifted. The market has a cut this month almost fully priced in, although there are a couple of key data releases between now and the meeting - most notably another employment report on the day after this report goes live (5 September). How the near-term US rate outlook evolves could dictate the next cycle in FX.
GBPUSD sits in a holding pattern...
...having broken its upward trend in July. The pair has since traded loosely in a sideways channel, waiting for its next trend to establish. The break to the three-year high of 1.3789 was the only brief exception in four months of trying to break 1.3600, while 1.3140 served as May’s low and set what looks to be a key Fibonacci retracement level. A factor to watch in the coming weeks is the potential cross of the 50- and 100-day moving averages, which may signal a downward move despite recent developments in short-term US interest rate markets. Most recently though, sterling has taken a leg lower, seemingly partly on concerns around the UK’s public finances. The Budget is now confirmed for 26 November.
GBPUSD trades in the mid-1.3000s waiting for a new trend
Notes: dma = day moving average; percentages refer to Fibonacci retracement levels.
Sources: Investec, Macrobond, Bloomberg.
Fiscal sustainability fears grow in Europe
Long-dated gilt yields have hit 21st century highs
However, the climb in yields and particularly the increasing ‘term-premium’ is a global phenomenon, as per Chart 2. So while rising issuance costs are a concern for the UK Chancellor, Rachel Reeves, it isn’t yet Armageddon, and our economists reckon some of the estimates of the so-called ‘fiscal black hole’ may be overly pessimistic. That said, as I noted last month, the market will watch developments with increasing scrutiny, and sterling will trade nervously. In recent days that has seen GBPEUR fall back below 1.1500, but again that is within the summer’s key range while we wait for the next cycle of trading. European political concerns are reemerging too, which may begin to add offsetting weight to the euro.
Term premia on sovereign yields increases globally
Sources: Bloomberg, Macrobond, Investec
France garners unwanted market attention again
French Prime Minister François Bayrou has called a confidence vote in his own government, set for 8 September, hoping to gain support for the government’s contentious Budget. That, however, does indeed look hopeful. Should he lose, President Macron could ask him to remain as caretaker. Alternatively, there could be new legislative elections, which would resurface fears of a shift to the far-right, as had emerged a couple of years ago and hurt the euro. Elsewhere in Europe, and giving further evidence that fiscal concerns are a key market focus, the SEK and NOK have outperformed in the G10 space, both countries having famously low national debt piles. Meanwhile, the NZD has underperformed following a central bank meeting that signalled further interest rate reductions ahead.
Forecasts
Sources: Macrobond, Bloomberg, Investec
GBP/USD
Sources: Macrobond, Bloomberg, Investec
GBP/EUR
Sources: Macrobond, Bloomberg, Investec
Notes: Forecasts are produced by Investec Economics and are for end-quarter
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Ria Selvaratnam
Head of Treasury Sales
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