In our FX review this week, we look at the earlier part of the week where most of the action unfolded. After kicking off with poor Chinese data early on Monday, risk sentiment managed to recover to finish the week. The pricing in of a rate hike from the Bank of England was the key event that helped GBP to shine as the performer in the G10 space.

A bad start to the week

Early on Monday, market participants woke up to find out that Chinese Q3 GDP came in at 4.9% versus 5.2% expected. It didn’t get the week off to a great start. As we’ve spoken about several times before, a China slowdown remains one of the largest risks for markets heading into the end of the year. For FX specifically, a slowdown would hit trading partners the most. 

For example, AUD would come under pressure, particularly with iron ore exports to China. Europe as well would be in a tricky spot, adding another reason why we don’t like the EUR at the moment.

Fortunately, the data miss didn’t derail the entire week, and for the most part the bad news was taken relatively well by the major currencies.

Sterling outperforms

The main focus for ourselves here in the UK was bond markets seeing yields rise. This correlates to recent speeches from Bank of England members, that make it apparent that an interest rate hike is looming. 

In fact, with several large banks (including Goldman Sachs) coming out and looking for a November hike, GBP was off to the races. We took profit on our long GBP/USD trade at the 1.3800 level, which we flagged up in our QuickPick here.

It’s a difficult one to forecast on where GBP goes from here. On the one hand, interest rate hikes are positive for the currency. Yet we are seeing rising Covid-19 infection rates, that again could be a cloud over the economy.

We are also still not out of the woods regarding the supply chain disruption and shortage of HGV drivers. So on balance, although we aren’t flipping to being outright bearish GBP from here, we are definitely more neutral in our stance.

Looking ahead to the coming week

In terms of what we are looking at going forward, we still have our open short USD/JPY trade. We’ve seen energy prices stabilise somewhat in recent days, which has eased the pressure on JPY selling.

We have the Bank of Japan meeting on Thursday, so will look for any interesting comments from this to gauge the future direction for the Yen. At present we don’t see any likely material changes to the monetary policy.

The ECB also meeting on Thursday, with other important data points out from Europe throughout the week as well. We are still bearish on the currency, given the lack of appetite to raise rates anytime soon.

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