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Foreign Exchange Analysis ~ 14 August 2023


GB Pound

Sterling weakened in dull markets dominated by a slight feeling of risk aversion.


What to watch for in the short-term?

With the Bank of England caring little for anything that isn’t wages or inflation, this week’s data calendar is incredibly crucial for understanding the sterling curve into the close of the year.


Inflation pressures are weakening globally and a downside surprise could increase the conversation around a pause in the hiking cycle in September. Only one MPC member voted for such a move at the August meeting – two voted for a 50bps hike – so a lot would have to change in Wednesday’s CPI report to be make this more of an outside chance.


What about the coming months? GBPUSD could and should be entering a period of consolidation given both central banks are coming to a conclusion of their cycles and the pair is essentially carry neutral.


Calendar


Tuesday 07.00 BST | UK Wages

Wednesday 07.00 BST | UK Inflation


US Dollar

What happened last week? Fears over Chinese growth and strong US data suggests an ongoing bid for the greenback will be present. What to watch for in the short-term? Data from the US economy, particularly those measuring consumption and the jobs market, has been consistently strong for a number of months now; solidifying the belief in markets that the Fed may not have to hike rates any more but it will be a long while before any cuts are seen. Risk aversion is also supporting USD and ructions in Chinese markets could be enough to boost USD vs CNH and other Asian currencies, in turn allowing for dollar strength against those currencies linked to commodities. What about the coming months? Fed communications could start to cement rates in the US sitting above 5% well into 2024; positive for the USD against most currencies. Calendar Wednesday 19.15 BST | Fed Minutes


Euro

What happened last week?

Euro markets are quiet but are also not doing well given risk aversion around Chinese financial sector issues.


What to watch for in the short-term?

Nothing ever happens to the euro in August and this year is no different. EURUSD is trading almost exclusively as a function of the USD currently and while we sit in a low volatility world, that should continue to benefit the dollar given the carry dynamics.


What about the coming months? Only 18 of a 25bps hike is priced in for the ECB by the end of the year which we think looks light. That being said, we do expect the ECB to cut expectations for Eurozone growth in the coming weeks. Wednesday 10.00 | European Q2 GDP


Calendar

Wednesday 10.00 BST | European Q2 GDP




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