Ella 
GBP/USD fell after the latest UK labor market data pointed to the possibility of stagflation. Employment fell by 207,000 in the three months to July, with the largest losses in the trading, manufacturing and transportation/warehousing sectors. Meanwhile, the unemployment rate rose 0.1% to 4.3%, in line with expectations reflected in a Bloomberg survey.
In stark contrast, UK wage growth unexpectedly climbed sharply, beating consensus expectations. Wages increased by 8.5% year-on-year in the three months to July, with public sector pay rises playing a leading role in this growth trend. The sharp rise in real wages may cause concern for the Bank of England (BOE). Economists at HSBC expect the Bank of England to ultimately raise interest rates by 25 basis points at its meeting on September 21. While this may initially be positive for the pound, it must be recognized that the risk of slower economic growth and rising unemployment may be detrimental to the exchange rate. Therefore, I expect GBP/USD to fall to 1.23 by the end of the year.
EUR/USD weakened as the German ZEW survey reflected worsening conditions. The indicator plummeted to a bleak -79.4 in September, down sharply from -71.3 previously and even worse than the consensus forecast of -75.5. Ongoing headwinds such as soaring oil and energy prices, coupled with weak global demand, are contributing factors to the challenges facing the German economy. Efforts to boost Germany’s economy appear to be falling short of expectations, exacerbating the situation.
However, the ZEW sentiment index rose to -11.4 from the previous reading of -12.3, which was higher than the Bloomberg consensus forecast of -15.0. While this development is positive, it’s important to note that these figures remain firmly in negative territory. Additionally, all components of the IFO German Manufacturers Survey declined at the end of last month.
Given these ongoing challenges and continued weakness in the euro, we expect EUR/USD to reach 1.05 by the end of the year.
AUD/USD fell slightly overnight but still held on to most of the previous day’s gains. Australian consumers are currently grappling with the impact of tighter monetary policy. The Westpac Consumer Confidence Index in September was 79.7, compared with the previous value of 81.0, a monthly decrease of -1.5%. Even as concerns about further tightening by the Reserve Bank of Australia (RBA) have diminished, this pessimism among Australian consumers remains.
August’s NAB Business Conditions and Confidence Survey was slightly positive. Both surveys showed a slight improvement in the economy, offering a glimmer of hope. However, it is important to remain vigilant, as tight capacity utilization and continued increases in costs and prices will continue to keep the Reserve Bank of Australia on its toes.
