Sterling ticked higher against dollar as focus stays on rate outlook

Reuters: Sterling ticked higher against the dollar on Monday, with market moves largely driven by news of a surprise announcement from OPEC+ of more production cuts which sent the price of oil and the dollar sharply higher earlier in the session.

British Pound Sterling ticked higher against the dollar

By 10:30 GMT the pound was up 0.18% against the dollar which trimmed gains, at $1.2352. The pound, meanwhile, was virtually unchanged against the euro at 87.96 pence. “The impact overnight in the Asian session was one of higher oil after the OPEC cuts, meaning lower chances of rate cuts by the Fed and so a higher dollar. But now the dollar is coming off again,” said Francesco Pesole, FX strategist at ING.

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With little in the way of UK-specific data this week, attention is staying on the Bank of England’s rate outlook and the UK’s economic outlook. “The pound is the best performing currency of the year which is somewhat surprising, the economic backdrop is not exciting. The Bank of England is still hiking but it is nearing the end of its hiking cycle,” said Pesole. The pound ended March with its biggest monthly gain in four months of 2.6%. “At the same time, the pound went through the banking shock very well and it proved to be very resilient,” said Pesole.

British inflation is around 10.4% – over five times the Bank of England’s target rate of 2% and the highest among the Group of Seven rich nations. The BoE has raised interest rates 11 times in a row with its next meeting set for May. Markets are pricing in a 66% chance of a further 25 bp hike from at its next meeting, and a 34% chance of no change. Traders will be listening carefully to a speech due from Bank of England chief economist Huw Pill on Tuesday evening for more hints on the central bank’s next move.

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US Dollar

Reuters: The dollar wobbled on Tuesday after a slump in U.S. manufacturing activity last month pointed to further signs of a slowing economy and trumped renewed inflation concerns following OPEC+’s surprise output cut. The Institute for Supply Management (ISM) survey showed on Monday that manufacturing activity fell to the lowest level in nearly three years in March as new orders continued to contract, with all subcomponents of its manufacturing PMI below the 50 threshold for the first time since 2009. That sent the greenback broadly lower, tracking a slide in U.S. Treasury yields, as investors pared expectations on how much longer interest rates would need to remain in restrictive territory. Against the sliding dollar, the British pound and the Australian and New Zealand dollars rose to multi-week highs in early Asia trade on Tuesday. Sterling peaked at its highest since late January at $1.2425, extending the previous session’s 0.7% gain.

The kiwi rose 0.2% to $0.6310, its highest since mid-February, while the U.S. dollar index was marginally lower at 102.02, having fallen more than 0.5% on Monday. “The ISM manufacturing report for March was a dud,” said economists at Wells Fargo. “The closest thing we get to good news in (the) report is that the slowing in the factory sector is pushing prices lower and supply chains are continuing to heal, benefiting from the slack. “Beyond that, the rest of the themes were those that often precede an economic recession.” The euro was last 0.03% higher at $1.0905, having gained more than 0.5% on Monday. Against the Japanese yen , the dollar slipped 0.09% to 132.35. Futures pricing show that markets expect the Federal Reserve to begin cutting rates as early as September through the end of the year, with rates seen just above 4.3% by December. The two-year Treasury yield, which typically moves in step with interest rate expectations, was last at 3.9841%, having fallen nearly 10 basis points on Monday.

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The sluggish U.S. economic data overshadowed renewed inflation fears after the OPEC+ group jolted markets with plans to cut more production, a move which sent oil benchmarks jumping 6% on Monday. “Apart from the direct cost impact of the 6-7% jump in oil prices, economic headwinds are also posed by the prospects of stickier inflation prolonging the global tightening cycle (and) intensifying policy trade-offs,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank. Elsewhere, the Aussie steadied after rising to a more than one-month high of $0.67935 earlier in the session, ahead of a key monetary policy decision by the Reserve Bank of Australia (RBA) later on Tuesday. The RBA will pause policy tightening according to a poll of analysts, although a strong minority still forecast a hike. Data out last week showed Australian inflation slowed to an eight-month low in February, due in part to a sharp retreat in prices for holiday travel and accommodation.

South African Rand

Reuters: South Africa’s rand was flat on Monday, having regained its losses from earlier in the day after a decision by major oil producers to reduce supply caused the dollar to briefly spike. At 16:15 GMT, the rand traded at 17.8000 to the dollar, close to its previous close of 17.8050. The dollar index which measures the currency against six rivals, was down about 0.8%. The Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, announced on Sunday its decision to reduce oil supply by about 1.16 million barrels per day.

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The decision pushed oil prices up over 6% on Monday and drove dollar strength initially, although it was short-lived. Investors are on diverging central bank policy with the Federal Reserve widely viewed as nearing the end of its rate-hike cycle. South African stocks rose on Monday, with the Johannesburg All Share index and the Top-40 index up about 0.7%. The rise in oil prices caused energy shares to gain globally. South African petrochemical group Sasol ended the day with shares up 5.7%.

Shares of UK-based real estate trust Industrials, which has a secondary listing on the Johannesburg Stock Exchange, rose almost 38% after it agreed to the terms of an offer to be acquired by Blackstone. The government’s benchmark 2030 bond was weaker, with the yield up 3.5 basis points to 9.865%.

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Global markets

Reuters: Asian stocks dithered on Tuesday as investors grappled with inflation concerns in the wake of the surprise cuts to the OPEC+ group’s oil output targets, while treasury yields retreated after frail U.S. manufacturing sector data. An announcement on Sunday of output target cuts by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, propelled oil prices higher and complicated the inflation outlook. Brent crude was up 0.5% to $85.39 per barrel, after jumping over 6% overnight. Investors were also assessing Monday’s economic data, which showed U.S. manufacturing activity in March slumped to its lowest level in nearly three years as new orders plunged, and analysts said activity could decline further due to tighter credit conditions. “A weakening trend has been in place since May last year, but recent banking turmoil may have dented confidence further,” ANZ analysts said in a note. “Manufacturing is one of the most rate-sensitive sectors of the economy as goods like autos are primarily bought on credit. There continues to be encouraging news on goods inflation.”

Early in the Asian day, MSCI’s broadest index of Asia-Pacific shares outside Japan was trading steady. Japan’s Nikkei stock index rose 0.24% while Australian shares were up 0.1%. China’s blue-chip CSI300 index edged down 0.16% in early trade, while Hong Kong’s Hang Seng index opened 0.64% lower. On Monday, gains in energy shares helped lift world stock indexes following the surprise OPEC+ group’s new production cuts that could push oil prices toward $100 a barrel. The S&P 500 energy sector index surged 4.9% with Chevron Corp, Exxon Mobil Corp and Occidental Petroleum Corp all rallying more than 4%. However, the prospect of higher oil costs added to inflation worries on Wall Street just days after evidence of cooling prices raised expectations that the U.S. Federal Reserve might soon end its aggressive monetary tightening campaign. The Dow Jones Industrial Average rose 0.98%, the S&P 500 gained 0.37% and the Nasdaq Composite dropped 0.27%. Shares of Tesla Inc dropped 6.1% after disclosing March-quarter deliveries rose just 4% from the previous quarter, even after CEO Elon Musk slashed car prices in January to boost demand.

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Market watchers have been trying to gauge how much longer the Fed may need to keep raising interest rates to cool inflation and whether the U.S. economy may be headed for recession. Treasury yields retreated after the U.S. manufacturing data, which increased expectations for some investors the Fed will cut rates later this year as the economy slows. Separate data also showed U.S. construction spending weakened in February. The yield on benchmark 10-year Treasury notes was last at 3.4263% compared with its U.S. close of 3.432% on Monday. The two-year yield, which rises with traders’ expectations of higher Fed fund rates, touched 3.9841% compared with a U.S. close of 3.98%. The dollar reversed some losses but remained on the defensive after losing ground on Monday in the wake of the weak U.S. economic data. The U.S. dollar index which tracks the greenback against a basket of currencies of other major trading partners, was last up at 102.11. The euro was a touch higher at $1.0904, while against the Japanese yen, the dollar was off 0.09% at 132.35. Gold was slightly lower. Spot gold was traded at $1982.19 per ounce.

Published by the Mercury Team on 4 April 2023

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