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Foreign Exchange Analysis ~ 11 April 2023


GB Pound

What happened last week?

A short week and an absence of data kept the pound quiet as we headed into the Easter break.


What to watch for in the short-term?

We have said for a number of weeks that the UK holds possibly the most data-dependent relationship between its currency and the workings of the wider economy.


The hope is that the data and speeches from Bank of England Governor Andrew Bailey this week will further flesh out the positioning of policy makers towards higher rates to control higher than expected inflation against the prospect of a policy mistake that clamps down on growth too aggressively.


Bailey is in Washington for the IMF meetings this week and will speak on the subject of the 'The shifting risk landscape’ tomorrow.


What about the coming months? Markets remain happy to price in a hike of 25-50bps this summer from the Bank of England but a pause at the current level of 4.25% is underpriced from our point of view and could come to pressure the pound.


Calendar

Thursday 07.00 BST | UK Monthly GDP


US Dollar

What happened last week?

Markets seemed happy to forget about financial stress for a little bit, although wider systemic risks remain.


What to watch for in the short-term?

This week’s reading of US inflation and the minutes of the Federal Reserve meeting in March are perfect for understanding the mindset of the world’s most important central bank; any sign that the Fed is close to its zenith for rate hikes and we’re looking at dollar weakness throughout the G10 and EM.


This message will be especially powerful if added to by thoughts that financial stress could cause the Fed Funds rate to be lowered.


What about the coming months? The May meeting should see the Fed’s final 25bps hike of this policy cycle given moves in both jobs and inflation in recent months. It will be what happens in wider markets – financial stress essentially – that governs whether the Fed needs to mount a rescue.


Calendar

Wednesday 13.30 BST | US CPI

Wednesday 19.00 BST | Fed meeting minutes


Euro

What happened last week? EURUSD remained surprisingly stable in the face of a strong US jobs report. What to watch for in the short-term? Watching EURUSD flirt with 1.10 as a level is becoming increasingly frustrating for those of us who are hoping for a break above in the coming weeks. Should wider market sentiment remain favourable to risk – higher equity markets for example – then we can see the pair happily trading around the 1.09s given the ability of the pair to almost disregard the strength of the US jobs market last week. What about the coming months? Much like in the UK, we can see the ECB’s rate tightening stance softening this summer. A sole 25bps hike in June would make sense alongside language that rates will remain at that level for a period of time. Such a viewpoint could be enough to keep the single currency bid. Calendar Thursday 10.00 BST | Eurozone Industrial Production





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