End-of-month trading will dominate the pound against the euro and the dollar

31.8.22: Month-end trading and global stock market moves crucially for short-term euro and pound moves against the dollar

Monetary policy expectations and risk appetite will remain extremely important for exchange rates in the near term.

There were other hawkish rhetoric from Federal Reserve and ECB officials.

This rhetoric will provide an element of support for the dollar and euro in global markets and will also tend to keep risk appetite on the defensive.

The overall narrative should be little changed in the near term, with inflationary fears dominating. Oil prices, however, fell sharply on Tuesday and another sustained retreat would offer hope of a spike in inflation and limited breathing space for central banks.

From a medium-term perspective, fiscal policies will also be a major focus with strong pressure to provide additional support to combat the impact on households of soaring energy prices.

If equity markets focus on the medium term and regain ground, risk-sensitive currencies would be in a better position to regain ground.

British Pound and US Dollar Exchange Rate Outlook

The exchange rate between the pound and the dollar (GBP/USD) failed to improve on Tuesday and gradually lost ground with new 2-year lows near 1.1620 before rising to 1.1680 on Wednesday.

Overall confidence in the UK outlook deteriorated further, with credit card borrowing higher than expected, seen as evidence of distress borrowing rather than confidence in personal finances.

Declining risk appetite and falling equities have also shaken confidence in the British currency.

Energy prices will inevitably be a major concern in the near term, with renewed fears of major damage to the economy.

Political pressure will mount ahead of the appointment of a new prime minister early next week with swift and decisive action needed to reverse negative sterling sentiment.

A revival in risk appetite would provide some limited relief to GBP/USD, but relatively weak UK fundamentals will continue to undermine overall support with little chance of a sustained recovery at this stage.

Euro (EUR) exchange rate today

Overall confidence in the outlook for the Eurozone remains very weak with renewed concerns over recession as soaring energy prices take hold.

There has, however, been hawkish rhetoric from ECB officials with fresh speculation that the central bank will raise interest rates by 75 basis points at the September policy meeting.

The euro/dollar (EUR/USD) exchange rate managed to find support below 1.0000 on Tuesday and posted a limited net gain to 1.0040 on Wednesday.

Expectations of a more aggressive ECB stance will provide some protection for the euro.

Gas prices also fell on the day, with Germany saying it had made faster than expected progress in building up gas stocks, but the Nord-Stream pipeline will be closed for the next three days and l euro will be vulnerable if prices rise again.

Given the relative outlook for the euro and the US, Commerzbank sees little scope for euro gains

On the economic outlook, he notes; "We don't know if and to what extent energy shortages will put pressure on the eurozone economy as it largely depends on the whims of the Russian president. However, what we do know is that this is a risk that the US economy does not face in this form.

He also continues to view the ECB as a catch-up; "The US key rate is 2.25 percentage points higher than that of the euro zone with roughly similar inflation rates. Thus, if the ECB raises its key rate in line with the Fed in September (ie by 75 bps), this only means that it will not be left behind any longer. However, this does not put the euro in a relatively better position against the dollar.

US Dollar (USD) Exchange Rate Outlook

The dollar maintained a strong overall tone on Tuesday with a recovery in consumer confidence and further evidence of a strong labor market.

There was further hawkish rhetoric from the Fed with New York Fed President Williams saying the bank should maintain a restrictive policy.

Overall, the Dollar fell slightly during the day as the Euro showed some resilience.

There will be some choppy month-end trading on Wednesday.

The USD as a whole is likely to maintain a strong tone for yield reasons with only limited room for correction at this stage with a reluctance to sell the US currency.

Other currencies

The pound remained broadly vulnerable on Tuesday, although there was an element of resilience on the crosses.

The exchange rate between the British pound and the Australian dollar (GBP/AUD) fell to a 4-year low below 1.6900 before a sharp rally just above 1.6950.

A drop in oil prices undermined the Canadian dollar, with the exchange rate between the pound and the Canadian dollar (GBP/CAD) rising to 1.5275.

The latest data showed a slight improvement in business confidence.

The exchange rate between the British pound and the New Zealand dollar (GBP/NZD) found support at a 2-week low near 1.8950 and rose slightly above 1.9000.

The day to come

The latest Eurozone inflation data will be released on Wednesday with a consensus forecast of a new record high of 9.0% for the headline rate.

The pressure for the ECB to raise interest rates more aggressively will intensify if the data is stronger than expected.

The US will release revamped ADP jobs data with the risk of an erratic release, although the overall impact should be limited ahead of Friday's jobs report.

There will be a significant month-end position adjustment on Wednesday, increasing the risk of jerky movements in exchange rates, especially late in Europe.