Euro fluctuates as Nord Stream 1 Shuttered, US dollar retreats from 20-year high

Philip McHugh September 12th 2022 - 4 minute read

The euro traded in a wide range last week, as the closure of a vital gas pipeline into Germany infused volatility into the currency.

At the same time, the US dollar climbed to a new 20-year high, before succumbing to some profit taking.

Trade in the pound is mixed so far this week, GBP/EUR is subdued at €1.15 while the GBP/USD exchange rate approaches $1.17.

Looking ahead, GBP investors will be kept busy by a slew of high-impact UK data. Will some underwhelming releases lead Sterling to weaken in the coming days?

Pound fluctuates as Liz Truss outlines energy price freeze

The pound initially stumbled last week. The currency being pressured by a spike in European gas prices and a weaker-than-expected UK services PMI.

However Sterling sentiment quickly recovered amid reports that incoming Prime Minister, Liz Truss was planning to freeze energy prices. GBP investors were hopeful the move could keep a lid on inflation.

GBP exchange rates then faltered again in the middle of the week amid some dovish rhetoric from Bank of England (BoE) policymakers.

Speaking before the Parliament’s Treasury select committee policymakers sought to play down expectations the bank might accelerate its monetary tightening cycle.

BoE policymaker Catherine Mann, warned, ‘more forceful bank rate moves open door for policy hold or reversal later.’

The pound then rallied on Thursday after Liz Truss unveiled her ‘energy price guarantee’. GBP investors welcomed Truss’s plan to support households and businesses by freezing energy prices for two years, but Sterling’s gains were tempered by concerns over how much the UK will need to borrow to cover the cost.

Sterling was then subdued at the end of the session as the death of Queen Elizabeth II, led the BoE to delay its next interest rate decision.

A raft of high-profile UK data releases looks set to infuse additional volatility into GBP exchange rates this week. The most impactful of which may be Wednesday’s consumer price index. Could another spike in domestic inflation weaken the pound?

In the meantime, the UK’s latest jobs report may also soften Sterling if wage growth continued to underwhelm in July.

Euro rocked by closure of Nord Stream 1 pipeline

The euro got off to a poor start last week as EUR investors were spooked by Russia’s decision to shut off the key Nord Stream 1 pipeline ‘indefinitely’.

The news propelled European gas prices to new highs at the start of Monday’s session, with the euro stumbling amid fears that gas shortages this winter could expedite a Eurozone recession.

The euro was quick to rebound in mid-week trade, however. The uptick in the single currency being underpinned by a stronger-than-expected Eurozone GDP release as it reinforced expectations the European Central Bank (ECB) would raise rates by 75bps at its upcoming policy meeting.

While the ECB did deliver a 75bps hike as forecast, the back’s accompanying macroeconomic projections applied some pressure to the single currency after the ECB slashed its 2023 Eurozone growth forecast.

This week has seen the euro storm higher, amid chatter that the ECB could follow September’s record rate hike with another 75bps increase at its next meeting.

However the single currency’s gains could be tempered later in the week, particularly in the wake of Germany’s latest ZEW survey as analysts forecast economic sentiment in the Eurozone’s largest economy will have continued to deteriorate this month.

US dollar slips from multi-year highs

The US dollar opened last week on strong footing, with demand for the safe-haven currency being underpinned amid a gloomy market mood after Russia shut off a key gas pipeline to Germany.

The release of the latest ISM non-manufacturing PMI lent further support to the ‘greenback’ in the first half of the week after reporting a surprise acceleration of growth in the US service sector in August.

The upbeat PMI figures, coupled with a hawkish speech from Federal Reserve Chair Jerome Powell, bolstered Fed rate hike bets, carrying USD exchange rates to a 20-year in the process.

However, the US dollar was forced to shed the majority of its gains at the end of the week as a rebound in market risk appetite triggered a bout of profit taking from USD investors.

The publication of the latest US inflation figures will no doubt be the primary focus for USD investors this week.

If US inflation continued to decelerate in August, this could lead investors to scale back Fed rate hike bets and could lead to a weaker US dollar.

Likewise, an expected stalling of US retail sales last month is also likely to reflect poorly on the ‘greenback’.

Australian dollar undermined by RBA’s ‘dovish’ hike

The Australian dollar tumbled at the start of last week, with the AUD/USD exchange rate striking a new two-year low in the wake of the Reserve Bank of Australia’s (RBA) latest interest rate decision.

While the RBA raised rates by another 50bps following its September meeting, its forward guidance was very dovish in tone, with the bank signalling it may slow the pace of future hikes.

A weaker-than-expected domestic GDP release in addition to underwhelming Chinese trade figures kept the pressure on the ‘Aussie’ in the middle of the week.

However AUD exchange rates then rallied sharply at the end of the week, as a pullback in the US dollar lead to a marked improvement in market risk appetite.

The ‘Aussie’ has so far maintained this upward momentum at the start of this week, amid persistent risk-on flows.

The release of Australia’s latest jobs report could help to reinforce these gains later in the week if August’s figures point to another strong month of employment growth.

Written by
Philip McHugh

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