The dollar remained well supported yesterday, with cable dropping down into the lower half of $1.36-1.37 and EUR/USD holding beneath the $1.17 level. The action was attributed to another bout of risk aversion, linked to concerns surrounding the spread of the delta variant in Asia-Pacific and a Chinese regulatory crackdown. It has been suggested that the Fed’s apparent willingness to taper its asset purchase programme before end-year may also be acting as a headwind. However, we are sceptical of this narrative given that the central bank has signalled it was edging toward this decision well in advance and has explicitly emphasised that the move to taper will be state-dependent (i.e. they won’t act if activity slows markedly).
Indeed, we are increasingly of the view that the latest bout of risk aversion may in fact be driven by technicalities rather than fundamentals. The timing of recent minor sell-offs on equity markets has come at exactly the same time of the month, coinciding with the monthly ‘Options Expiration’ date. As a result, we are inclined to believe that the sell-offs may instead be a function of hedging activity as dealers look to cover their exposures in the lead-up to this date.
On the FX front, these bouts have also been associated with dollar gains that have subsequently partially unwound. Assuming the pattern holds, we may see an apparent rebound in risk appetite next week, with the dollar handing back some of its recent gains. In terms of the day ahead, a quiet macro schedule suggests such flows will remain the main driver of the action.
Sterling remained under pressure yesterday, with GBP/EUR dropping below the €1.17 level as the risk backdrop remained unfavourable. The publication of a very weak retail sales report for July did not help the currency, though there was no major reaction in FX markets. Sales plunged by 2.5% in the month (forecast 0.4%), but as we highlighted in our weekly the consensus projection looked significantly too optimistic given the advent of the ‘pingdemic’ over the course of July. The switch from goods to services expenditure as the economy continued to re-open would also have acted as a headwind.
On a more positive note, consumer confidence data released overnight showed that sentiment held up reasonably well in August. Consumers remain upbeat about their personal financial situations and the economic outlook, supported by the easing in the growth rate of new Covid-19 cases, the end of self-isolation requirements for those double jabbed and the hot labour market. High-frequency indicators also suggest that consumer spending is rebounding, with OpenTable restaurant reservations marching higher, retail footfall trending upwards and card-spending holding above July levels (though remaining well-short of pre-pandemic norms). Overall, this data back our view that UK fundamentals remain strong, which we believe will see the recent losses for sterling unwound over the coming sessions.
It was more of the same in the eurozone yesterday, as the single market currency struggling for direction amid a quiet macro schedule. There is little to suggest it will be any different today, with the action in the euro set to be driven by the other half of its main pairs as a result.
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