Due to the Labor Day holiday in the United States, trading volumes were low on Monday. In the coming week, trading activity is expected to pick up, and overall activity will also increase after the holiday season ends in the US and Europe.
The movements of global funds will have a significant impact on asset prices during this month. Increasingly, it is believed that global interest rates are close to a peak and that the Federal Reserve and ECB will not raise interest rates further.
The focus will shift towards how long peak interest rates will last. Currently, it appears that central banks will push back against expectations that rates will be cut sooner rather than later. In addition to halting the progress in cutting headline inflation rates, higher energy prices will reinforce expectations of stricter monetary policy from central banks. Stagflation fears will increase if economic data suggests a downturn, combined with weak growth and persistent inflation.
September tends to be a month with negative seasonal trends, affecting the markets adversely. Although a recession is looming and the labour market is softening, Rabobank stated that Brent is now nearing $90. Chinese manufacturing is still expanding even though today’s Caixin services PMI dropped to 51.8 from 54.1, so it’s unclear whether the usual narratives of “rates fall soon!” or “stocks keep rising!” still hold. Instead, supply-side stagflation is the danger.
Unless China sanctions aggressive fiscal policy responses, risk appetite will likely be fragile.
Euro (EUR) Exchange Rates Today
Despite Nagel’s hawkish rhetoric on Monday, the Euro-Zone data have failed to justify an aggressive stance. Despite increasing investor confidence for September, the Euro-Zone Sentix investor confidence index dropped to –21.5 from –18.9. This was below consensus forecasts of –19.6 and close to the lowest reading for 2023.
At the ECB’s September policy meeting, markets still expect no rate hikes. In Monday’s trading session, the Euro/Dollar exchange rate (EUR/USD) fell just below 1.0800, unable to hold above the level.
Early on Tuesday, EUR/USD dipped to its lowest level in two months, below 1.0765, due to a lack of confidence in the Chinese economy.
US Dollar (USD) Exchange Rates Outlook
Monday was a holiday for the US markets due to Labor Day. Due to the markets still digesting jobs data released last week, US data releases in the short term will also be limited.
There has been little net change in Federal Reserve interest rate expectations, with the chances of a September rate hike seen at below 10% with the chances of a November hike close to 40%. Fed policy is expected to remain restrictive.
In the near term, there will be limited data release, with global conditions closely monitored. The dollar will maintain a firm tone unless there is a sustained improvement in risk appetite and increased confidence in the global economy.
As a result of the Chinese data, the dollar advanced, especially since Country Gardens requested rescheduling more bond payments. Joe Capurso, the strategist at the Commonwealth Bank of Australia, said that despite various policy easings by China, market participants were still unconvinced about China’s economic and currency outlook.
Other Currencies
A consensus forecast for interest rates at the Reserve Bank of Australia’s latest policy meeting was 4.10%. The bank states that there may still be some need for further tightening in policy even though inflation has peaked.
As a result of the decision, the Australian dollar declined, and weaker-than-expected Chinese data also affected it. There was an increase in the Pound/Australian dollar exchange rate (GBP/AUD) above 1.9700, which marked a 10-day high.
In addition, the weaker-than-expected Chinese data also weakened the New Zealand dollar, resulting in the Pound to New Zealand dollar (GBP/NZD) exchange rate strengthening to 2.1390.
The Day Ahead
The US may release its latest consumer confidence data on Tuesday, but there will be no major data releases on Tuesday. On Tuesday, US bond and equity markets will play a crucial role in determining the overall market’s direction. During the next 24 hours, Chinese developments will remain a key influence. Earlier this week, Australia released its second-quarter GDP data, with consensus forecasts calling for a 0.3% rise after showing a 0.2% increase.
