Geopolitical Risks Weigh On Currencies

GBP: Sterling sideshow

Sterling is rather a sideshow at the moment given that investors are largely preoccupied with events in the Middle East and whether the Fed is embarking on a somewhat less hawkish narrative. It is, however, quite an important week for Sterling in that we have wages and CPI data released tomorrow and Wednesday, respectively. Markets still have not completely written off the view that the BoE has one more hike. In fact, 16bp of further tightening remains priced. This week's data should play a big role in determining whether the BoE does hike on the 2nd of November. The difficult international environment should mean that GBP/USD remains biased back to the recent lows near $1.2050. Any upside surprise to UK price data this week looks more like it will be played out in GBP/EUR.

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EUR: Energy story starting to weigh

EUR/USD is extending gains toward $1.0550 amid a broadly softer US Dollar early Monday. Further upside in the pair, however, appears elusive amid escalating Hamas-Israel geopolitical risks. High oil prices are starting to see Terms of Trade slowly shifting against the Euro. The energy shock is nowhere near as strong as it was last August but still, the direction of travel warns that the energy-importing currencies of Europe and Asia will continue to under-perform.

As an aside, political developments in Poland this weekend could come to be seen as a mild Euro positive in that it seems a more Brussels-friendly government will be incoming.

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USD: Dollar in demand

The Dollar remains well bid as markets nervously monitor developments in the Middle East. This theme could dominate FX markets in a relatively quiet week for US data. On that subject, we may see slightly softer US data this week - with downside risks to tomorrow's release of September US retail sales. Here, slowing credit card activity warns that the all-powerful US consumer may have run deeper into its savings than most expect. This week also sees plenty of Fed speakers.

Were it not for the geopolitical situation, we would have been warning that the Dollar could correct a little lower this week on the prospect of softer US consumption data and seemingly a new path for Fed communication that tighter US financial conditions mean less need for tightening. However, uncertainty in the Middle East and higher energy prices will see investors continue to back the energy-independent Dollar for the time being.

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