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Foreign Exchange Analysis ~ 03 July 2023


GB Pound

What happened last week?

GBP markets continued to digest the surprise 50bps increase in the BOE base rate with recession fears increasing.


What to watch for in the short-term?

It’s a bit obvious to sit here and state that the pound is becoming increasingly data focused but given market expectations of a further five 25bps increases in the base rate between now and the peak of the hiking cycle, it also happens to be the truth.


The only accompaniment to the data will be speeches from BOE members and whilst one of the more dovish members – Silvana Tenreyro – has now left her post – such high level of expected hiking must be backed up both in data and in statements from MPC members.


There is little of either this week and so it may be a week of sideways motion for sterling assets.


What about the coming months? Retailers are anticipating a strong summer as UK consumers do what they do best; shop. Such a pull through of spending may be enough to keep UK data looking strong into Q3 although we anticipate this strength is being pulled through from later in the year, bringing forward sterling outperformance.


Calendar

Friday 07.00 BST | UK BOE Quarterly Bulletin


US Dollar

What happened last week? Jerome Powell drove rate expectations higher although the dollar lost ground against every G10 currency except the yen in June. What to watch for in the short-term? Independence Day ensures that this week will start quietly but Fed minutes and payrolls reports on Wednesday and Friday respectively, there is definite event risk in dollar markets. Chair Powell’s speech in Sintra was enough to add 10bps of expected tightening to the US curve; something that could allow for a higher USD, especially should Friday’s job and wage numbers show that the American jobs markets remains strong. What about the coming months? Dollar strength is not a consensus call in FX markets through the 2nd half of the year and would upset more than a few dynamics. Weak hands in GBPUSD and EURUSD could easily fold back to previous ranges. Calendar Wednesday 19.00 BST | Fed Minutes Friday 13.30 BST | US Non-Farm Payrolls


Euro

What happened last week?

ECB members spoke at the Sintra central banking conference, heightening the chance that rate hikes will extend beyond September.


What to watch for in the short-term?

While the overall levels are lower in Europe than they are in the UK, both the ECB and the BOE are dealing with falling headline inflation but rising core prices.


Neither are in a position to halt hiking rates however and with a July hike pre-announced by ECB Chair Lagarde last month, the euro’s ongoing strength will depend on the ability of the European economy to sustain rate rises into Q4.


What about the coming months? A newly hawkish Fed is going to hurt hopes of a EURUSD move above 1.10.


Calendar

Friday 07.00 BST | German Industrial Production




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