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Foreign Exchange Analysis ~ 02 May 2023


GB Pound

What happened last week?

The pound is sat in the shadows at the moment, happy to see the euro and the dollar slug it out for the limelight. Inflation data remained painfully high.


What to watch for in the short-term?

Data from the UK economy, alongside likely moves elsewhere within the G10, make it an almost certainty that a hike in interest rates will happen next week.


This is fully priced in at the moment so will offer little support to sterling unless the attached Quarterly Report from the Monetary Policy Committee suggest that the recent dovishness in some quarters has diminished. We think that is doubtful but high consumer spending and an inflation number above 10% could easily prove us wrong.


What about the coming months? Swaps markets have rates at close to 5% in November of this year (4.9% as of this morning) and we feel this is overly confident. We would expect that this will pull towards 4.5% in time as the peak rate, damaging sterling prospects.


Calendar

Thursday 09.30 BST | UK Services PMI


US Dollar

What happened last week? Despite First Republic Bank needing to be swallowed by JP Morgan the dollar has remained resolutely calm. What to watch for in the short-term? We have to doubt whether the calm of the past few weeks will last beyond the next few days with a Fed meeting on Wednesday and Friday’s jobs numbers. Overnight we heard from Australia that their pause in rates could only last a month, casting doubt on many calls that the Fed will be able to pause and especially cut rates this year. What about the coming months? Debt ceiling concerns are increasingly becoming front page news in the States and will weigh on the dollar eventually. Calendar Thursday 13.30 BST | US Initial Jobless Claims


Euro

What happened last week?

EURUSD continues to hover around 1.10 and with a rate decision on Thursday, who could blame it?


What to watch for in the short-term?

Ongoing concerns over tighter lending markets has seen the euro wobble a little lower with more in markets now expecting only 25bps from the ECB this Wednesday as opposed to 50bps.


Lending figures from the Eurozone suggest that credit conditions have tightened despite demand from businesses and households falling.


This may be enough to stop the ECB from pushing for further hikes, something that would cause us to reconsider our bullish expectations for the single currency.


What about the coming months? While rates may not go much higher than current levels, there seems to be little suggestion that they will drastically decrease anytime soon. Higher for longer will be used to eliminate the spectre of 8% inflation in Europe.


Calendar

Thursday 13.15 BST | ECB Rate Decision

Friday 10.00 BST | Retail Sales




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