UK: Weekly FX Market Update 6 February
The pound fell 2.75% against the US$ and 2% against the Euro last week, despite the Bank of England (BoE) hiking interest rates by 0.5%.
BoE Governor Bailey said inflation had ‘started to turn a corner’.
BoE Economist Pill added on Friday that he had ‘high confidence inflation will fall through the second half of this year’ and that he ‘sees inflation back at 2% in the middle of 2024’. He continued that the Bank ‘must guard against doing too much on rates’.
Deutsche bank considered that the BoE was now only 0.25% away from the terminal/peak rate expected for UK interest rates.
UK data is very much in the spotlight this week. Construction PMI is released on Monday, BRC retail sales on Tuesday, monetary policy report hearings are on Thursday and we have a ‘data dump’ on Friday with GDP, Industrial production and preliminary business investment all due for release.
Bank of England members Mann and Pill both speak on Monday, Ramsden on Tuesday, and Pill speaks again on Friday.
The ECB hiked interest rates by 0.5% and also signalled that they would raise rates by 0.5% at their next meeting in March.
This came after the first estimate of Eurozone CPI was released at 8.5% with core inflation at 5.2% and above the 5.1% expected.
ECB Lagarde again said that the ECB would ‘stay the course’, on inflation – a nod to further rate hikes.
ECB’s Wunsch added on Friday that if core inflation remains persistent, a 3.5% terminal rate is the minimum.
EURUSD had managed to trade briefly at the psychologically important 1.1000 for the first time since April last year, but slipped lower at the end of the week.
The Federal Reserve had been expected to hike interest rates by 0.25% on Wednesday and they duly did.
The accompanying statement added that ‘inflation has eased somewhat but remains elevated’ and continued that ‘ongoing increases in the target range will be appropriate’ .
Fed Chair Powell sounded as hawkish as he could by adding that the FOMC is ‘talking about a couple more rate hikes to a restrictive level’.
If this is the case, the peak terminal rate could get to between 5% & 5.25%.
Current Bloomberg expectations of the terminal rate are 4.9% in June 2023.
The week ended with US jobs data providing a boost to the US$. Jobs added to the US economy were 517k and 2.5 times the 195k expected. The unemployment rate fell to 3.4%. However, the figures are compared with a year ago when the US was emerging from covid, so analysts are urging caution here.
For the week to come Fed Chair Powell speaks on Tuesday.
Events for the weekend ahead:
Mon Feb 6
08:40 GBP MPC Mann Speaks
09:30 GBP Construction PMI
10:00 EUR Retail Sales
17:00 GBP MPC Pill Speaks
Tue Feb 7
00:01 GBP BRC Retail Sales
03:30 AUD Cash Rate/Rate Statement
07:00 EUR German Industrial Production
09:00 GBP MPC Ramsden Speaks
13:30 USD Trade Balance
17:00 USD Fed Chair Powell Speaks
17:45 CAD BoC Macklem Speaks
Wed Feb 8
14:15 USD FOMC Williams Speaks
Thu Feb 9
09:45 GBP Monetary Policy Report Hearings
10:00 EUR EU Economic Forecasts
Fri Feb 10
00:30 AUD RBA Monetary Policy Statement
01:30 CNY CPI
07:00 GBP GDP/Prelim GDP/Goods Trade Balance/Industrial Production/Prelim Business Investment
11:00 GBP NIESR GDP Estimate (Estimated Release Time As Well)
13:30 CAD Employment Data
14:00 GBP MPC Pill Speaks
15:00 USD Prelim UoM Consumer Sentiment
17:30 USD FOMC Waller Speaks