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Foreign Exchange Analysis ~ 22 May 2023


GB Pound

What happened last week?

Sterling has once again traded at the behest of its dollar and euro counterparts, driven by factors outside of the UK’s control.


What about the coming months?

Following a slowdown in wage growth, the table is very much set for a similar slowdown in inflation and a subsequent decision by the Bank of England to hold interest rates at its June policy meeting.


Wednesday’s inflation number could very easily be treated as a binary, up and down look at BOE policy in June and, with it, the relative strength of sterling. Currently 19bps of tightening is priced in – a 76% chance of a rate hike – and so a disappointment to that could easily be a real blow to sterling bulls.


What about the coming months? With a summer of US political news set to keep the dollar volatile, it makes sense that sterling losses will likely be more keenly felt against the EUR.


Our expectations remain of a EURGBP rate that closes in in 0.90 through the summer.


Calendar

Wednesday 07.00 BST | UK Inflation


US Dollar

What happened last week? Hopes of a near-term deal on the debt ceiling evaporated, adding to haven dollar buying desires. What about the coming months? While some had hoped last week would see a debt deal done in the US, with President Biden heading to the G7 in Japan, a deal looks more likely in the coming few sessions. Alongside higher growth expectations in the states and some hawkish rhetoric from Fed officials, all signs have been pointing towards a stronger USD. We don’t expect this to last too long however and with a deal in place in Washington, market expectations will shift back to higher carry to be found outside of the USD. What about the coming months? A resumption of normality – a signed debt ceiling agreement – should open the gates for a dollar depreciation in H2. Calendar Friday 13.30 BST | US Durable Goods Orders


Euro

What happened last week?

As with sterling, EURUSD has traded purely as a function of the news around the US debt ceiling and this is unlikely to change until a decision is made.


What about the coming months?

Euro watchers spent all of last week looking at Washington and while that is not going to change anytime soon, news closer to home will start having an effect on things once again.


Comments from ECB members suggest that hikes will continue to be priced in to euro curve until September, and therefore there is little upward pressure to come on short term rates that is not already there.


Alongside the chance of dollar strength as debt ceiling machination drive on, EURUSD could easily drift towards the 1.07 level.


What about the coming months? Our longer-term expectations of euro outperformance remain in place, once the market sees past the US debt ceiling speed bump.


Calendar

Wednesday 09.00 BST | German IFO




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