Friday, September 16, 2022

Daily Market Overview

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• RIP cable. GBP/USD in early European trading slipped below the 1.1412 support (2020 low). At 1.138, the currency pair is trading at its weakest level since 1985. It’s a long way still, but from a technical point of view there’s little to prevent cable from revisiting the all-time low at 1.052. Sterling faced selling pressures for some time already but this morning’s ugly August retail sales (-1.6% m/m, -5.4% y/y) were the straw that broke the camel’s back. It’s basically the cost-of-living crisis in numbers. The pound also loses out vs an otherwise lackluster euro. EUR/GBP broke above the 0.8721/31 resistance levels (previous 2022 high/2021 correction high). Momentum faded a bit after hitting an intraday day peak of 0.877 but the pair is still changing hands at 0.875 at the time of writing. The neckline of the 2020 triple top formation at 0.886 marks the next reference on the technical charts. Next week’s delayed Bank of England meeting will be an interesting once. Markets have more or less abandoned the idea of a 75 bps hike and instead assume a second consecutive 50 bps hike. That’s reasonable given the abysmal eco data this week but still very high inflation. Whether that’ll support the pound, especially against the USD, is debatable. UK financial markets are closed on Monday for Mourning Day. For the Queen and, perhaps, sterling.

• Other data today included final European HICP, which was adjusted upwards in the monthly figure (0.6% m/m). Following the release of this report, US consumer confidence (U. of Michigan) is still due. ECB’s Lagarde in a speech said they “absolutely want to avoid second-round effects” while Finnish governor Rehn saw a case for frontloading the tightening cycle. Core bond yields continue their trip north. The 2y European swap yield adds 4 bps, extending yesterday’s break above the 2011 peak. Today’s move means that the 2y and 10y segment now have also inverted. German yields jump 1.2 bps (30y) to 6.4 bps (2y). Yields in the US gain up to 6.2 at the very long end. The 2y rises 3.9 bps to 3.9% and is closing in on the psychological 4%. The dollar remains in the driver’s seat amid ongoing equity risk off (up to -1.6% on WS). The S&P500 extends losses after losing support from the upward sloping trendline yesterday. DXY rips above 110 again. EUR/USD gently drifts south to 0.996. The Japanese yen is the only G10 currency able to stand up against the USD. USD/JPY eases slightly to 143.15. EUR/JPY falls to 142.67. Maybe next week’s BoJ meeting looming made investors wary of a sneaky move to close some shorts. Earlier this week the central bank performed a rate check, usually the last warning shot before actual (but not certain) FX interventions.
News Headlines

• Core inflation (net of food and energy prices) in Poland as published by the National Bank of Poland today accelerated further by 0.8% M/M and 9.9% in August (was 0.6% M/ and 9.3% in July). All other core CPI measures (net of administered prices, 15% trimmed mean, net of most volatile prices) were higher than in July both in M/M and Y/Y terms. Earlier this month the statistical office already reported headline inflation at 0.8% M/M and 16.1% Y/Y. Within the national bank of Poland, MPC members are still divided whether inflation is close to the peak, allowing the NBP bring the rate hike cycle to an end or whether some additional further hikes are needed. Polish short-term yields are easing slightly today (2-y swap -10 bps) but most of this move already occurred before the release. The zloty today strengthened slightly to EUR/PLN 4.715.

• The central Bank of Russia today as expected further reduced its policy rate from 8.0% to 7.5%. Comments from the central bank after the decision suggest that rate cuts might be coming to an end. Amongst others even some tightening might be needed to bring inflation back to the 4.0% target in 2024 if the fiscal deficit continues to widen. Inflation in August stood at 14.3% and the central bank expects it to finish the year in between 11-13%. The ruble today continued to trade in within a tight consolidation pattern (currently USD/RUB 60.45 area).

Graphs & Table

DXY: trade-weighted dollar makes another attempt at the 110 resistance.

GBP/USD: cable drops to lowest level since 1985 after abysmal retail sales.

After 2y/5y inversion, the 2y/10y segment follows suit.

EuroStoxx50: real yields bite, not only in US stocks.

Note: All times and dates are CET. More reports are available at which you may sign up to.

This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.

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