While tech stocks had their worst week since April’s “liberation day” crash, currency markets largely took the AI mini-crash in stride. G10 currencies remained in tight ranges, while some emerging market currencies posted modest gains. Amid this calmness, it is worth noting that Sterling weathered the Bank of England’s dovish turn in November well, posting modest gains against the dollar. The week’s loser was the New Zealand dollar on disappointing labor market data there. As this is written, hopes are rising for a resolution to the US Federal shutdown impasse. This would restart the release of economic data and shed much-needed light on the state of the US economy.
Enrique Diaz – Alvarez Chief Economist at Ebury said: “Next week will be busy for Sterling, as labor market data released Wednesday is followed by third-quarter GDP and September industrial production on Thursday. Little is expected to happen in the Eurozone. Whether we receive any market-moving news about the US economy will, of course, depend on an agreement to end the shutdown. We will also be following developments in the stock market, as wealth effects and the impact of AI investment have probably been a net support for the US dollar.”
GBP
The Bank of England maintained rates unchanged last week, but barely, as four of the nine MPC members dissented—more than had been expected. Sterling bore this surprisingly well, rebounding after a short post-meeting downdraft. While we wait for the key November 26th budget release, this week’s economic data will be key, given the apparent data dependence of the MPC. The employment report on Tuesday and the flash GDP release on Wednesday are key. Any positive surprise on either will force markets to reprice the chances of a December cut, currently seen at 70%
EUR
The only notable news from the Eurozone this week will be the release of the first revision to third-quarter GDP numbers. We look to it to confirm the modest improvement in the tone of economic news lately. With the ECB on hold for the foreseeable future, we continue to wait for evidence of the massive German fiscal stimulus package, announced earlier this year, to start showing up in the leading economic indicators, which may be the catalyst needed for another leg up in the euro versus the dollar.
USD
The limited, privately or state-sourced data that we are still getting from the US suggests that job creation remains anemic, but layoffs remain at very low levels. Last week’s Challenger layoff report seemed to show a spike in firings, but we would heavily discount this particular data point, as it has not been a reliable indicator in the past. While the U.S. economy appears relatively undamaged by the shutdown, this could quickly begin to change if it lasts much longer. Air travel cancellations and chaos this week may be the first sign of lasting damage. We do expect the additional political pressure from this and other impacts to bring about an agreement that will restore the normal flow of data and economic reports.
