News, insights and analysis from the global FX markets
GBP
August saw the pound continue to cool, after topping the charts above the 1.31 mark against the US dollar back in July. Sterling continued to meander lower against the dollar, which dropped as much as 2.3% throughout August. Interest rates were once again nudged higher by the Bank of England at the start of August, taking the headline rate to 5.25% – making the 0.1% rate of December 2021 nothing but a distant memory.
The Bank is continuing to increase the base rate for the United Kingdom, following stubborn inflation readings throughout the course of the last few years. Food and natural resource prices remain the main sticking point for the UK, but employment figures being higher than anticipated created a fierce job market and increased salary offerings – and in turn spending power – to prospective employees. The September inflation and employment releases will be closely monitored by the market before the next Bank of England meeting in the third quarter of the month.
USD
Despite mixed signals on the likelihood of further rate hikes in the second half of 2023, the USD had one of its strongest-performing months in August, with the DXY appreciating more than 1.6%.
Even though there’s no longer clear consensus in the market on whether to expect another dollar rate hike in 2023, what seemed clearer was that the probability of the FOMC lowering rates any time soon has definitely dropped, which has been supporting the USD.
In the latest FOMC meeting minutes, the Fed mentioned that there’s still “significant upside risks to inflation, which could require further tightening of monetary policy.”
The still somewhat hawkish stance of the Fed, despite already much lower inflation, is likely to support the USD through the rest of the year.
EUR
August’s Eurozone PMI data has increased pressure on the ECB to reconsider its rate hike plans, given weakening economic indicators and stubbornly high core inflation.
The ECB faces a delicate situation as they monitor these developments closely. They’ll evaluate inflation risks in upcoming meetings, possibly considering further interest rate increases if necessary. Conversely, they might opt to delay such moves if disinflation progresses as expected.
Notably, ECB’s July meeting minutes indicated an initial preference for maintaining interest rates, but a 0.25% hike was eventually decided. Eurozone CPI has been
persistently around 5%, potentially forcing a rate hike in September.
Recent data showed Eurozone inflation at 5.3% in August, slightly lower than July. While the ECB’s restrictive policy is impacting inflation, achieving the 2% target remains uncertain, leading to differing market opinions.
Concerns are growing as Europe experiences weakening growth, raising recession fears alongside high inflation. Central bank meetings in Europe and the USA will be closely watched for insights into future monetary policy decisions.
AUD
In August, we saw the Australian dollar (AUD) depreciate the most against the Greenback and the pound sterling, whereas it gained more than 1.2% against the yen.
Being a proxy for China’s economic prospects, the AUD is facing the wrath of weak demand in China due to a higher jobless rate and significant deflation risks. Moreover, negative news regarding China’s property developers, Evergrande and Country Garden, defaulting on payments didn’t help the Australian dollar.
In response to prevailing market conditions, the Reserve Bank of Australia (RBA) decided to maintain its official cash rate at 4.10%. Despite keeping the possibility of future rate hikes open, the RBA presented a more pessimistic economic outlook. Additionally, local employment data came in below expectations, with a loss of 14,600 jobs instead of the anticipated 15,000 increase. Moreover, the unemployment rate edged higher to 3.7%.
The July monthly inflation figure came at 4.9%, lower than June’s 5.4%, which is welcomed by the RBA and practically solidifies the expectation of no rate hikes in the September meeting.
NZD
The New Zealand Dollar (NZD) was the worst-performing currency among the G10, with the NZDUSD pair the biggest loser. The pair dropped from highs of 0.6110 to 0.5890 in August. Risk aversion, China’s economic woes and downbeat domestic data weighed heavily on the NZD.
As was widely anticipated, the RBNZ decided to maintain the official cash rate steady at 5.50%. In the monetary policy statement, the central bank indicated that interest rates will remain at a restrictive level for some time. Furthermore, the central bank now forecasts the cash rate at 5.5% through December 2024 and then to fall to 3.38% by September 2026, which lends some support to the NZD.
Additionally, the NZ unemployment rate for Q2 rose to 3.6% (vs 3.5% expected), with the nation’s trade balance recording a deficit of $15.81B in July YoY.
CNH
The PBOC, on the other hand, surprised the market by lowering borrowing rates for the Chinese yuan in the third week of August. This sent USDCNH rates much higher, treading dangerously close to its yearly high of just under 7.35 last seen in Nov 2022. At the same time, the PBOC once again stressed the importance of a “stable yuan” to the recovery of the Chinese economy.
In the last week of August, the PBOC also took words to action by lowering the domestic foreign currency deposit reserve ratio. This action effectively releases more foreign currency liquidity into the Chinese domestic market, which is an act to support the yuan. It was a surprise to the market, which instantly sent the USDCNY more than 300 points down to around 7.24.
Once again, the PBOC has proved that they still have ample tools in their exchange rate toolbox to tackle any unwanted exchange rate volatility in the yuan.
These comments and policy actions were taken by the market as solid support for the Chinese yuan and there’s now stronger consensus in the market that the ceiling of 7.35 is unlikely to be broken any time soon.
JPY
As August comes to a close, the JPY is once again facing downward pressure, continuing a trend observed since February where the currency weakens against major currencies towards the end of each month. This pattern is driven by movements in Japanese equities and bond markets, prompting asset managers to readjust their portfolios to adhere to allocation rules by month-end. This portfolio rebalancing, combined with hedging activities, contributes to the selling of the yen. Expect the trend of end-of-month yen selling to continue, as high hedging costs and the Bank of Japan’s ongoing monetary easing policy contrast with potential US interest rate hikes. The recent decline has brought the yen close to 150, a level that might lead Japanese officials to intervene in order to slow down the currency’s drop.
THB
Thailand appointed a new prime minister this month and international investment is expected to resume, which will positively impact the stock market and the value of the baht. The delay in political decisions had led to the withdrawal of investments. Prior to the parliamentary vote confirming the new prime minister’s success, the THB rallied. However, the baht’s value decreased 0.2% against the dollar the following day. RBC Capital Markets predicts that the baht might face challenges due to China’s economic slowdown, with a noted impact on tourism, potentially affecting the baht’s performance.
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Disclaimer: All data presented is provided by Bloomberg and other publicly available sources, WorldFirst does not produce independent financial market research or currency forecasts, and has not verified the accuracy of the contents. The information presented does not constitute advice or financial recommendation, and WorldFirst shall not be responsible for any losses or damages arising from your reliance of such information.
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