2022 September Outlook For G7 Currencies

2022 September Outlook for G7 Currencies

September 14, 2022

2022 September Outlook for G7 Currencies

Dollar, Euro and Pound

Dollar extended its rally supported by hawkish Fed

The Dollar Index rallied to a new 20-year high of 109.5 at the end of the month, following the strong emphasis by the Fed in continuing to tighten their monetary policies. The latest speech by Fed Chair Jerome Powell during the Jackson Hole Symposium noted that the Feds were still determined to bring down inflation rates to 2% and would be raising interest rates to 3.75% to 4% by the end of the year, despite recessionary concerns. In response to Fed’s aggressive stance to rein in inflation, markets are anticipating a 75-bps rate hike during the coming FOMC meeting in September. On the data front, job openings for July totalled at 11.24 million, greater than the estimated 10.3 million. Nonfarm employment change rose by 315k compared to the expected 295k, suggesting a resilient labour market amid the uncertain economic climate. On the other hand, price pressures have yet to peak with core CPI m/m data in August recording a 0.6% growth, exceeding market estimates of 0.3%, which put further pressure on the Fed to take on more aggressive rate hikes to curb inflation, with markets anticipating a 75bps rate hike in its September’s meeting. Looking ahead, the Dollar’s strength is expected to remain supported as Fed continues its tightening cycles.

Eurozone’s deepening energy crisis weighs down on the Euro

The Euro extended its 3-month consecutive decline against the strengthening Dollar, hitting new lows of $0.99 and fell drastically by 12% since the start of the year. Inflation rose to a record of 9.1% year-on-year in August, up from the previous 8.9%, showing no signs of price pressures peaking as the energy crisis and Russian oil bans exacerbated the region’s supply-driven inflation. Meanwhile, Core CPI Flash estimates have risen to 4.3% yoy, ahead of the previous month’s 4.0%. The region’s battle against rising price pressures amid slower growth as August PMI data disappoint also increased the risks of stagflation which could leave ECB in a bind when they attempt to contain inflation which would come at the expense of growth. Investors will also watch the ECB monetary policy meeting closely, with markets anticipating a 50-bps rate hike in October, following a 75-bps hike in September to rein inflation and keep up with the Fed’s pace of monetary policy tightening.

Bleak outlook for the Sterling

The British Pound extended losses to a low of below $1.16 against the greenback, the lowest since March 2020, pressured by domestic inflationary risks. UK inflation rose drastically to a 4-decade high of 10.1% in July, up from the previous 9.4%, together with GDP falling by 0.6% month-on-month. Expectations of a recession in Q4 2022 have cast a gloomy outlook on the economy, with the soaring inflation on energy prices and cost of living. The persistent energy crisis could result in inflation exceeding 20% by next year if energy prices extend its spiral upwards.

EURUSD: Bearish below 1.0180

S1	S2	R1	R2
0.9680	–	1.0180	1.0350

GBPUSD: Bearish below 1.2350

S1	S2	R1	R2
1.1450	–	1.1850	1.2280

Commodity Currencies

Aussie remains vulnerable amid the macro headwinds

The Australian dollar depreciated to a 7-week low at 0.68, after peaking in the middle of the month due to the hawkish RBA. RBA hiked its interest rate by 50 bps in line with market expectations, bringing its cash rate to 2.35% in September and signalled further tightening ahead to bring inflation down to the 2-3% target range. Policymakers also reiterated that while higher interest rates could be expected in the coming months, the size and timings of the rate hikes would be based on the economic data. Despite RBA’s hawkish stance, further downside risks could be seen as the Aussie remains vulnerable to risk aversion seen in markets, caused by escalating fears of a global economic slowdown and renewed lockdowns in China, one of Australia’s largest trading partners. On the data front, a mixture of employment data surfaced, with employment numbers falling by 40.6k compared to the expected 26.5k rise, contrasting to the unemployment rate falling to a 49 year low of 3.4%. Meanwhile, Australia’s second quarter’s GDP grew by 0.9% qoq, indicating that growth remains resilient amid rising rates.

RBNZ proceeds with cautious tone

Kiwi dollar fell to $0.61, weighed down by the Dollar strength, despite RNBZ’s hawkish stance on its monetary policy. The Reserve Bank of New Zealand raised its official cash rate to 3% by 50 bps, delivering a total of 275bps of rate hikes in less than 12 months. Governor Adiran Orr also addressed recessionary concerns and hinted at pushing for zero growth while being cautious with future rate hikes. Meanwhile, disappointing retail sales and employment data continue weigh on consumer sentiment while macro headwinds could dampen the appeal of the risk-sensitive currency.

Loonie remains weak against greenback

Poorer than expected employment data weighed down on the Loonie as it weakened against the greenback with USDCAD hovering near July’s high, trading at around 1.32. On the data front, retail sales data recorded a 1.1% in June, its sixth consecutive increase showing that domestic growth remains resilient amid the macro headwinds. Meanwhile, employment change fell short of expectations, recording a 30.6k decline instead of a 14.2k increase in jobs. CPI was at 0.1% month-on-month, its lowest since January. Looking forward, the Canadian Dollar is expected to remain weak against the greenback, until demand side issues revolving around oil are resolved.

AUDUSD: : Bearish below 0.6980