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Foreign Exchange Analysis ~ 17 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?

It is a thumpingly important week for the pound this week with data on employment, inflation and retail sales all due over the course of the next few days that will likely set the course for interest rates from the Bank of England at its May decision.


As we noted last week, there is more than a marginal chance that the Bank of England holds off on further hikes, especially if wage and retail sales data mirrors expectations of a softening inflation picture.


Should the Bank of England follow its counterparts in Canada and Australia then GBP’s strength around 1.25 in Cable may be shortlived.


What about the coming months? Data currently points to a period of, at best, stagnation in the UK economy and any further hikes in the UK base rate will be due to persistent inflation pressures. We think that the Bank of England is nowhere close to beginning a policy shift towards rate cuts.


Calendar

Tuesday 07.00 BST | UK Wage Growth

Wednesday 07.00 BST | UK CPI

Friday 07.00 BST | UK Retail Sales


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?

The dollar has little to take notice of in the short-term with a 25bps hike for May now fully priced, it would take a huge shift in market psychology for that to change.


That being said the belief remains that this will be the last of the cycle as the Fed then waits for the impact of tighter credit conditions caused by the March wobble in banking markets.


What about the coming months? Wider dollar weakness is indeed possible as we get closer to a deadline on the US debt ceiling. Upcoming data on tax receipts will give us an idea as to how long the clock can tick before a showdown, although we remain a while away from seeing the USD pull lower on these concerns.


Calendar

Thursday 13.30 BST | US Initial Jobless Claims


Euro

What happened last week? EURUSD drove above 1.10 on Friday and how able it is to hold these levels remains all-important. What to watch for in the short-term? Euro watchers are keyed in for the ECB meeting on May 4th and with 32bps of hikes currently priced in market participants are evenly split over whether the Executive Council decide on a hike of 25bps or 50bps. With a purdah period beginning next week, speeches from rate-setters this week will be even more important for hints of guidance ahead of the meeting. A 50bps hike could be enough to see EURUSD finally plant its flag above 1.10. What about the coming months? The European economy has emerged from the energy crisis winter with more than enough storage for this year’s demand. While inflation may not be an issue heading into the end of the year, we see it as a reason why the ECB will not be eager to cut rates quickly. Calendar Friday 08.30 BST | German preliminary PMIs




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