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Foreign Exchange Analysis ~ 21 February 2023


GB Pound

Market focus fell once again on to the Northern Ireland protocol and the longer term outlook for Brexit relations both for the UK as a whole and within the Conservative Party.


What to watch for in the short-term?

Political news in the UK currently generates a lot of heat and noise but little actionable insight for currency markets. We don’t think sterling’s slight retracement last week had any foundation in PM Sunak’s plans to revise the Northern Ireland protocol. Rebels within the Conservative party are likely to kill it stone dead.


Monetary policy is expected to remain the main driver for sterling in the coming weeks, with trends both in EURGBP and GBPUSD set to remain in place into March.


What about the coming months? It makes sense that longer term outlooks are on hold until March’s central bank meetings. With rates markets still guiding for lower rates by Christmas we expect the ECB, Fed and BOE to try and guide against this.


Calendar

Tuesday 09:30 GMT | UK Services PMI

Friday 00:01 GMT | UK Consumer Confidence


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 dollar’s recent bounce may be at an inflection point. Certainly, we will receive two inputs this week that should clarify how much further the dollar may have to go. First of all is Wednesday’s release of the latest minutes from the Federal Reserve meeting.


Focus will fall on how close the decision at the meeting was to a hike of 50bps as opposed to the 25bps that was eventually agreed.

Secondly, Friday’s inflation numbers will show just how much price rises are slowing.


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 minutes to further push back on such beliefs.


Calendar

Wednesday 19:00 GMT | FOMC Minutes

Thursday 13.30 GMT | US Q4 GDP


Euro

What happened last week?

EURUSD looks to have bounced off a low just above 1.06, with EURGBP not moving more than 1.5% over the course of the week.


What to watch for in the short-term?

The ECB is continuing to try and communicate that inflation is not going anywhere in the Eurozone. ECB member Isabel Schnabel noted in a speech that the disinflation process had not even started in the euro area and while markets were unwilling to drive too much euro strength off this comment, her voting record suggests that her views are close to consensus.


For now, that story is not helping the euro much but it will have to eventually.


What about the coming months? We pointed out last week that the bottom of the range in EURUSD may be as low as 1.05. 1.0613 held last week and will likely be counted on support ahead of Wednesday’s Fed meeting.


Calendar

Tuesday 08.30 GMT | German HICP



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