Daily FX 24.08.22: European Energy Costs Still Crucial For Pound Vs Euro, Dollar – Exchange Rates UK

24.8.22: European Energy Costs Still Crucial for Euro and Pound Moves against the Dollar
The relative outlook for major economies will remain a key element in the short term.
There have been very strong expectations that the surge in energy prices in Europe will cause major damage to the UK and Euro-Zone outlook and that the US economy will out-perform.
The latest US data jolted this assumption of US out-performance on Tuesday, but the underlying narrative is likely to remain in place unless there is a shift to more dovish rhetoric from the Federal Reserve.
There will, therefore, tend to be a holding pattern ahead of Fed Chair Powell’s speech on Friday.
bannerGas prices and the Nord-Stream pipeline will be a key focus, especially with fears of aggressive Russian action on Ukraine’s Independence Day.
Nervous consolidation is realistic in the very short term with European confidence still weak.
The Pound to Dollar (GBP/USD) exchange rate managed to recover from two-year lows on Tuesday.
From a trough just below 1.1720, there was some relief after the latest UK PMI business confidence data with services still in expansion territory, although manufacturing data was weak.
GBP/USD then jumped to highs above 1.1850 after the weaker than expected US data.
There was, however, selling on rallies with an underlying lack of confidence in the UK outlook and GBP/USD traded just above 1.1800 on Wednesday.
Energy prices will inevitably remain a key focus in the short term with underlying fears that the surge in prices will cause major damage to the economy.
Overall, Sterling will still find it very difficult to secure sustained relief in the short term unless there is a pledge of very aggressive fiscal support to cap energy costs.
GBP/USD is set to be held below 1.2000 in the short term unless there is a break from pessimism surrounding energy costs.
The Euro to Dollar (EUR/USD) exchange rate dipped to fresh 19-year lows fractionally above 0.9900 on Tuesday before staging a recovery later in the day.
The latest Euro-Zone business confidence data remained fragile, but with some relief that an even more severe downturn was avoided.
The weaker than expected US data also helped trigger a brief EUR/USD rebound to just above 1.0000, but there was quick selling on rallies with EUR/USD sliding to just below 0.9950 on Wednesday.
Underlying confidence in the Euro-Zone economy will remain very fragile in the short term with on-going fears over gas prices.
The on-going drought in Europe will also have a negative impact as hydro-electric power levels run below normal levels.
Overall, EUR/USD will find it very difficult to secure sustained relief in the short term.
After early strength, the dollar lost some ground on Tuesday following the latest data releases.
The latest PMI business confidence data for the services sector was the main focus with the index indicating that there was further contraction for August with a slide to a 27-month low.
The data jolted confidence in the US economy which pushed the dollar lower.
There was still solid dollar buying on dips with expectations that the US economy will out-perform Europe given the energy-sector developments.
Hawkish Fed rhetoric also underpinned the dollar with the central bank still committed to combatting inflation.
The dollar is likely to maintain a firm tone, although with some caution ahead of Fed Chair Powell’s comments on Friday.
Barclays considers that dollar support elements remain in place; “concerns about a slowdown in Chinese activity have resurfaced, uncertainty around European energy security remains elevated and hopes for a dovish Fed pivot have waned as recent Fed commentary continues to push back against any notion that the tightening cycle might be nearing an end.”
It adds; “Our view remains that it is far too early for CBs to claim victory on their fight against inflation, and a hawkish message could push yields and the dollar back up again this week.”
High gas prices continued to underpin the Norwegian krone on Tuesday with very strong earnings from energy exports.
The Pound to Krone (GBP/NOK) exchange rate dipped to 16-week lows below 11.50.
A rebound in oil prices also supported the Canadian dollar with the Pound to Canadian dollar (GBP/CAD) exchange rate posting 9-year lows below 1.5300 before a tentative recovery to 1.5330.
The Pound to Franc (GBP/CHF) exchange rate managed to hold above 2-year lows and traded around 1.1400 on Wednesday.
The US data releases on Wednesday are unlikely to have a major impact. Given the importance of comments from Fed officials there will be an element of caution ahead of Kansas City Federal Reserve Jackson Hole symposium which starts on Thursday.
Fed Chair Powell is scheduled to make a key speech on Friday.
Energy prices will again be important during the day with a particular focus on gas prices on both sides of the Atlantic.
There was brief relief in Europe on Tuesday as gas prices dipped, but overall fears over European gas prices will continue as Russia maintains a tight grip on supply.
Low trading volumes will maintain the potential for erratic trading and equity-market moves will also be important.

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Tim Clayton
Tim is an economist and has been involved in financial markets for over 20 years as an analyst. He…
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