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Foreign Exchange Analysis ~ 12 December 2022

Updated: Jan 12, 2023

GB Pound

What happened last week? Sterling trod water through most of last week ahead of this week’s slew of central banking meetings. What to watch for in the short-term? Thursday’s Bank of England meeting shouldn’t upset sterling although there is every chance that we see the vote split four ways in the Monetary Policy Committee, something that has never been seen. Such is the level of uncertainty in UK policymaking at a time of rising prices, stagnant growth and extreme discontent in labour markets. As we noted last week, there can be only so long before this takes on a political turn, once again linking lower sterling with political pressures. What about the coming months? The Bank of England’s plans to sell debt purchased as part of pandemic assistance programs was postponed after the volatility from the Truss/Kwarteng mini-budget. We have seen these restart but take up may wane should UK rate rises slow, adding further risk for sterling. Calendar Thursday 12.00 GMT | Bank of England Rate decision

US Dollar

What happened last week?

The dollar managed to stem the losses last week and will be looking to inflation and this week’s Fed meeting for a strong rebound into the year end.

What to watch for in the short-term?

Market pricing for interest rates in the US show that the Fed Funds rate will top out around 1% higher than current levels before the US central bank begins cutting in the 2nd half of 2023.

This fits in with expectations for tomorrow’s inflation reading which hints at further softness in ongoing price rises.

Positioning suggests that investors remain net long the USD and so a weak CPI or dovish Fed meeting will have an outsized effect than the alternative.

We expect that the Fed will raise rates by 50bps on Wednesday evening and maintain a focus on growth as opposed to inflation. If the Fed’s messaging focuses in on prices more urgently, the dollar should gain ground.

What about the coming months? The risk environment is going to remain challenging heading into 2023 and should remain supportive of dollar advancement.


Tuesday 13.30 GMT | CPI

Wednesday 19.00 GMT | Fed meeting

Thursday 13.30 GMT | Retail Sales


What happened last week? EURUSD traded higher on a week with EURGBP moving in the opposite direction albeit rangebound between 0.8540 and 0.87. What to watch for in the short-term? It’s a busy week in Europe with central bank meetings in the Eurozone but also in Switzerland and Norway. There remains the chance that the ECB hikes rates by 75bps as opposed to the consensus view of 50bps which would be largely EUR supportive should it come to pass. Given EURUSD is nearly 10% higher than the lows seen in late September, there is every chance of consolidation at current levels. The SNB and Norges Bank are expected to raise rates 25bps respectively which should culminate both’s hiking cycles. What about the coming months? Despite the ECB being likely to guide that inflation will not exceed its target of 2% in 2025, we expect firms to continue cost-push inflation in the Eurozone making price rises stickier for consumers. Calendar Thursday 12.45 GMT | ECB Rate Decision

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