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Foreign Exchange Analysis ~ 07 August 2023


GB Pound

What happened last week?

The Bank of England hiked interest rates by 25bps last week, with sterling unable to take advantage of more carry support.


What to watch for in the short-term?

The Bank of England decision to hike rates is more interesting from the point of view of a three-way split in the voting record with members voting for a hold, and increases of 25 and 50bps.


For now, the consensus of continued pressure on prices will remain but, in time, we would expect to see more and more of the committee shift to a hold with potential doves angling for a cut.

The Bank’s own messaging suggest that a long hold is inevitable although wages and services inflation measures are now crucial.


What about the coming months? Sterling’s weak response to higher rates suggests that the majority of GBP watchers are on the beach but we cannot rule out additional sterling volatility as the central bank hike consensus continues to break down.


Calenda

Friday 07.00 BST | UK GDP


US Dollar

What happened last week? Friday’s job report offered a bit of dollar weakness into quiet markets but doubts remain as to how long such weakness may last. What to watch for in the short-term? Following a fortnight of strength it was welcome to see the USD weaken on Friday following a slightly poor jobs report. This is not the first time that the payrolls number has disappointed but it is the first time that that such a weak number has come with the markets being sat in a period of flux on the need for further rate hikes. As such, the dynamics for the USD as we move into the close of the year suggest that a period of overt global strengthening against the greenback may be hard to come by. August’s quiet markets will also deaden things for the next few weeks. What about the coming months? Inflation remains the key indicator moving forward and developments in both soft and hard commodity markets will be closely watched, especially given continual tensions in the Black Sea. Calendar Thursday 13.30 BST | US CPI Thursday 13.30 BST | US Initial Jobless Claims



Euro

What happened last week?

The single currency was relatively benign last week although the weaker US jobs report helped EURUSD off the lows.


What to watch for in the short-term?

With majority of Europe heading for the Mediterranean in August it feels like the currency has done the same. Trade in the euro is very quiet currently but with 18bps of hikes priced in for the end of the year there remains the prospect of a curve repricing.


Technically, the fact that EURUSD managed to hold around the 1.0920 level will offer some succour to those looking for a retest of the 1.10 level in due course.


What about the coming months? Moving into the close of the year, inflation, particularly on energy and food, will be crucial in Europe more so than anywhere else with hostilities in Ukraine continuing.


Calendar




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