23.11.22: Scottish Referendum Ruling Important for Sterling and Euro Moves against the Dollar

Trading volumes will dip ahead of Thursday’s US Thanksgiving Holiday which could lead to erratic moves during the remainder of this week, especially as there are already concerns over a lack of liquidity across asset classes.

Global economic expectations will remain a key element in the short term with the latest round of data from the US, Euro-Zone and UK.

Markets have adjusted their expectations to expecting a slower rate of interest rate increases by the Federal Reserve and other central banks, but rates are still expected to increase further at this stage.

There will be sharp market moves if there is any shift in market sentiment to expecting that Federal Reserve, ECB or Bank of England interest rates have peaked.

bannerAt this stage, such a development is unlikely, but a run of very weak data, especially in the US, would be a key element in shifting sentiment and would have huge implications for global exchange rates.

Pound US Dollar Exchange Rate Outlook

The Pound to Dollar (GBP/USD) exchange rate was able to resist selling pressure on Tuesday and posted net gains to highs just above 1.1900 before stabilising.

Domestic developments were limited with the Pound gaining net support from a solid tone in risk appetite as the UK FTSE 100 index posted 2-month highs.

The latest business confidence data will be watched closely on Wednesday with PMI data expected to indicate that the manufacturing and services sectors will both remain in contraction territory.

Very weak data would undermine the Pound while any net recovery on the month would provide important relief.

Political comments will be watched closely on Wednesday with the UK Supreme Court set to issue a ruling on whether the Scottish parliament can hold a second independence referendum without approval from the Westminster government.

If the Court rules against Holyrood, there will be some Sterling relief while a decision to allow a referendum next year would trigger a fresh spike in political uncertainty which would tend to undermine the Pound.

Overall global risk trends will also be important for GBP/USD moves with scope for net gains if equities make headway.

GBP/USD will need favourable domestic developments and gains in global equities to challenge the 1.2000 area.

Euro (EUR) Exchange Rates Today

There was further debate surrounding December’s ECB interest rate decision with hints from Bundesbank head Nagel that there was scope to hold the rate hike to 50 basis points rather than 75 basis points.

The Euro was resilient on the comments and able to post net gains with the Euro to Dollar (EUR/USD) exchange rate advancing to 1.0330 on Wednesday.

The latest data recorded a tentative recovery in consumer confidence for November.

Euro bulls will be hoping that Euro-Zone recession fears have been priced in with scope for further buying if there are any upside surprises for the business confidence data.

Overall trends in risk appetite and energy prices will also remain a key element for the Euro, especially given seasonal considerations.

Socgen notes that there are still important Euro risks and commented; “The huge elephant in the room – that a prolonged European gas shortage slows growth and raises inflation far more in Europe than it does in other areas (particularly the US), is just one reason why the euro’s revival (and the dollar’s turn lower) won’t be in a straight line.

The bank does note a slight improvement in fundamentals; “But we’ll take the positive of an improving balance of payment as what it is – good news at the margin.”

Overall, EUR/USD is likely to hit selling interest on any move to the 1.0400 area.

US Dollar (USD) Exchange Rates Outlook

The dollar overall drifted lower on Tuesday with gains in equities limiting any defensive demand for the US currency.

The Dollar to yen (USD/JPY) exchange rate retreated to below 141.00 before trading around 141.20.

The latest US regional manufacturing data from Richmond continued to indicate that the sector was in contraction territory which maintained reservations over the outlook.

There have been no major developments surrounding Federal Reserve policies with markets expecting that there will be a further 50 basis-point rate hike.

The most likely outcome is a further phase of consolidation with choppy dollar trading.

There will be a substantial dollar reaction if there is a fresh shift in Fed expectations surrounding the December meeting or a change in expectations surrounding terminal rate.

Other Currencies

The Reserve Bank of New Zealand (RBNZ) increased interest rates by 75 basis points to 4.25% following the latest meeting which was in line with consensus forecasts.

RBNZ Governor Orr stated that the hiking cycle is mature and closer to the end than the beginning, but he added that new shocks are arriving all the time and markets still expect further hikes.

The New Zealand dollar posted net gains following the decision.

There was choppy trading in the Pound to New Zealand dollar (GBP/NZD) exchange rate with a very wide 1.92-1.94 range and settled around 1.9260 in early Europe.

The Pound to Australian dollar (GBP/AUD) exchange rate posted 20-day highs around 1.7930 before a retreat to 1.7880.

The Pound to Yen (GBP/JPY) exchange rate was unable to break above 2-week highs at 168.30.

The Day Ahead

The US PMI business confidence data will be significant for overall sentiment towards the economy. Markets will scrutinise the Fed minutes from…

Read More: Scottish Referendum Ruling Important For Pound Vs Euro, Dollar

2022-11-23 12:05:00

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