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Foreign Exchange Analysis ~ 13 February 2023


GB Pound

What happened last week?

While the UK was shown to have missed out on falling into a technical recession, doubts over the ability of the Bank of England to meaningfully lower inflation made sterling gains difficult.


What to watch for in the short-term?

GBPUSD did indeed touch that 1.20 level last week and while the area of support did hold, the bounce back higher has been less than convincing.


The UK data calendar this week is full of wage and inflation data; cost pressures that are only becoming more and more of an issue for international UK corporates.


It is this data that policymakers are focused on and strength here will put the Bank of England in an unenviable position heading towards the end of Q1.


What about the coming months? The range of 1.20-1.25 in GBPUSD looks secure for now and further gains or losses will largely depend on how both the Bank of England and the Fed guide on rates towards the end of the year.


Calendar

Tuesday 07:00 GMT | UK Unemployment

Wednesday 07:00 GMT | UK Inflation


US Dollar

What happened last week?

The death of the dollar has been grossly overstated as the greenback continued to latch on to strong US data.


What to watch for in the short-term?

The scene is set for US economic data to outperform this week with a strong jobs report likely to have also bolstered inflation and retail sales data. Both could easily drive the dollar higher as investors and traders latch on to economic fundamentals as a differentiator to a world in which every central bank is talking about higher rates.


Given markets remain very happy to buy the US dollar ahead of key risk events as well as a defensive position, we could see general flows into the dollar increase.


What about the coming months? The curve for the Fed Funds rate still suggests market participants are looking for cuts by the end of the year; we see this as overly optimistic and will be looking for the Fed to further push back on such beliefs.


Calendar

Tuesday 13.30 GMT | US CPI

Wednesday 13.30 GMT | US Retail Sales


Calendar

Tuesday 13.00 GMT | Eurozone Q4 GDP


Euro

What happened last week?

The euro is starting to run out of steam having gotten off to a flyer. Ongoing growth and interest rate differentials are favouring the USD at the moment and EURUSD has begun to reflect this.


What to watch for in the short-term?

One of the main reasons for the slight collapse in the positivity behind the single currency is that markets are no longer as willing to believe the ECB’s pronouncements on further rate hikes as much as they did 6-8 weeks ago.


ECB President Lagarde will try and rebolster efforts to garner euro strength in a speech this Wednesday but without complementary improvements in growth and inflation, her pledges of higher rates will likely fall on deaf ears.


What about the coming months? If EURUSD can count on 1.10 as a line of resistance then 1.05 may be seen as a line of support in the coming months. A period of range bound trading is likely for now.


Calendar

Tuesday 13.00 GMT | Eurozone Q4 GDP



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