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Foreign Exchange Analysis ~ 10 July 2023


GB Pound

What happened last week?

Sterling made further gains against the USD, breaching the 1.30 level and becoming the best performing G10 currency vs the dollar this year.


What to watch for in the short-term?

A strong gilts market and expectations that the terminal rate for the Bank of England base rate could hit as high as 6.5% - currently it sits at 5% - has continued to power the pound’s outperformance.


That level of expectation does leave a lot of room for disappointment however and therefore there is more than a decent chance that sterling underperforms in the coming months.

With more than a month until the next Bank of England meeting, the temperature will be dictated by Tuesday’s wage numbers and the flow through into the CPI release next week.


What about the coming months? The issue remains for the UK economy that higher rates are bearing down on the property market and the marginal propensity of the average consumer to keep spending money. With potential tax cuts coming from the UK government heading into an election, inflation looks likely to remain an issue for many months to come.


Calendar

Tuesday 07.00 BST | UK Average Earnings


US Dollar

What happened last week? Last week’s jobs report was enough to make a Fed hike in July almost a certainty but leaves uncertainty elsewhere. What to watch for in the short-term? Payrolls in the US were a little weaker than expected with wages remaining high and unemployment moving lower, the doves are going to find it tough going in the short-term. Even if inflation disappoints in the US this week, the currency does look stable and there are not many new reasons to be short the greenback. What about the coming months? High yields on US debt and wobbly equities could put the dollar back in the limelight heading through Q3, especially given markets are only pricing in 35bps of tightening against the 50bps that the Fed’s most recent dot plot showed. Calendar Wednesday 13.30 BST | US CPI Friday 3.00 BST | Michigan Consumer Sentiment Index (Jul)


Euro

What happened last week?

The euro, despite the recent dollar weakness, cannot break above 1.10.


What to watch for in the short-term?

We think that struggle will continue for the single currency in the coming weeks as well as the dollar starts to react to increased hawkishness in Washington.


The differential in expectations between the Fed and the ECB has recently sat in the euro’s favour for a number of months but for now, could see a rebalancing towards the 1.08 level.


This week’s ZEW and HICP numbers may have enough to keep the euro stable although market liquidity remains light heading into holiday season.


What about the coming months? If you want a higher euro, we need to see continued, strong consensus from ECB members on rates.


Calendar

Tuesday 07.00 BST | German HICP

Tuesday 10.00 BST | German ZEW




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