• Audere Research

Foreign Exchange Analysis ~ 17 October 2022

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GB Pound

Political turmoil caused high volatility for the pound last week.


Movements

GBPUSD started the week at 1.1105 before dropping back below 1.10 on Tuesday. Cable then recovered, gaining 2.3% over Wednesday and Thursday, to touch a high of 1.138. The pair finally shed 1.4% on Friday closing the week at 1.1257 for a weekly gain of 1.37%.


GBPEUR opened at 1.1412 trading rangebound on Monday. After a 0.8% loss on Tuesday, sterling rallied midweek touching a high of 1.161 on Thursday. The pair then reversed some of the gains on Friday trading around 1.15 to close the week at 1.1552 for a weekly gain of 1.23%


Movement rationale

On Monday the BoE increased their bond buying facility and launched the temporary expanded collateral repo facility hoping to calm volatility in bond markets. GBPUSD and GBPEUR initially shed 0.8% on Tuesday on the back of further BoE intervention in Gilts despite UK unemployment touching its lowest level since 1974 (3.5%). Cable then reversed losses on Wednesday climbing from 1.097 to 1.113 as the markets started to welcome the move taken by the central bank to calm bond markets. Whilst governor Bailey confirmed Friday would mark the end of BoE Gilt purchasing, the pound rallied on Wednesday and Thursday’s sessions gaining on most majors as risk appetite improved and news broke that Liz Truss would announce a U-turn in fiscal policy. On Friday, Truss addressed the nation in a bid to reassure investors, announcing a turnaround on corporation tax, sacking Kwasi Kwarteng and naming Jeremy Hunt as new Chancellor. However, the move failed to restore market confidence, with Government borrowing costs jumping sharply and sterling weakening against major currencies. In terms of economic releases, weaker-than-expected GDP data was released on Wednesday, falling by -0.3% in September and giving strong signal that UK might be entering in a recession.


Week ahead

Inflation data on Wednesday will likely cause markets to reassess the size the next BoE interest rate decision.


Calendar

Wednesday 7am | CPI

Friday 7am | Retail sales


US Dollar

A hawkish Fed and hot inflation caused markets to lower their expectations of a Fed pivot.


Movements

EURUSD opened the week at 0.973 oscillating around 0.96-0.97 for the first half of the week. On Thursday the pair showed high volatility following US inflation figures, dropping to a low of 0.9630 before recovering up to 0.98. The pair close the week broadly unchanged at 0.9744.


GBPUSD started the week at 1.1105 before dropping back below 1.10 on Tuesday. Cable then recovered, gaining 2.3% on Wednesday and Thursday, to touch a high of 1.138. The pair finally shed 1.4% on Friday closing the week at 1.1257 for a weekly gain of 1.37%.


Movement rationale

The Dollar gained on most majors in Monday’s session as markets digested the strong employment data released at the end of the week before. EURUSD traded rangebound around 0.97 on Tuesday and Wednesday’s session ahead of US CPI. Reports of a fiscal U-turn in UK led to an GBPUSD appreciation midweek despite strong US inflation. Although CPI came in slightly lower than August’s print (8.2% Vs 8.1%), core CPI touched a 40-year high. In a volatile trading session, the dollar briefly spiked up before reversing the movement, driven by a jittery and distressed market. With inflationary pressures still accelerating, the Federal Reserve will likely be pushed for a fourth consecutive 75bp rate hike in November. Both GBPUSD and EURUSD fell on Friday’s session despite retail sales surprising to the downside (0% Vs 0.2% consensus).


Week ahead

A quiet economic calendar this week could mean dollar price action is determined by changes to risk appetite.


Calendar

Monday 7 pm | Monthly Budget Statement

Thursday 1.30pm | Initial Jobless Claims


Euro

Energy concerns increased last week after Russia escalated its invasion of Ukraine.


Movements

EURUSD opened the week at 0.973 oscillating around 0.96-0.97 for the first half of the week. On Thursday the pair showed high volatility following US inflation figures, dropping to a low of 0.9630 before recovering up to 0.98. The pair close the week broadly unchanged at 0.9744.


GBPEUR opened at 1.1412 trading rangebound on Monday. After a 0.8% loss on Tuesday sterling rallied midweek touching a high of 1.161 on Thursday. The pair then reversed some of the gains on Friday trading around 1.15 to close the week at 1.1552 for a weekly gain of 1.23%.


Movement rationale

As Europe had a quiet economic calendar last week, Euro price action broadly followed risk appetite taking cues from USD demand. The week started with further geopolitical unrest as Russia began tactical missile attacks on Ukraine. Subsequently, president Zelensky met with G7 members to discuss Russia’s recent escalation. The ongoing war was cited as a contributing factor to the IMFs revised global growth outlook (now 2.7% next year). With volatility in European energy markets, the IMF lowered next year’s European GDP forecast to -0.4% (from +2.5% forecasted in April). EURUSD briefly regained 0.98 on Thursday, however losses were nearly fully reversed in Friday’s session. For GBPEUR a stronger pound midweek lost steam in Friday’s session tracing back below 1.15.


Week ahead

With the next interest rate announcement on October 27th, any surprises to inflation on Wednesday could cause the ECB to change the magnitude of the next interest rate hike.


Calendar

Wednesday 10am | HICP

Friday 3pm | Consumer Sentiment




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