• Audere Research

Foreign Exchange Analysis ~ 23 May 2022

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GB Pound

GBP made strong gains against its peers on positive UK economic data, recouping some of the previous weeks’ losses.


Movements

GBPUSD opened at 1.2238 and progressively moved up. It recorded the biggest weekly increase so far this year (+2.68%) to close at a 2-week high (1.2566).


GBPEUR opened at 1.1750 and initially shoot up to reach 1.1912 on Tuesday. The pair then erased all gains in the following 24 hours before appreciating again on Friday to close with a gain of 1.32% at 1.1855.


Movement rationale

The Pound was heavily affected by economic data last week. It made strong gains on Monday and Tuesday in preparation for unemployment data which was a big surprise to the upside. Despite inflation and growth fears dominating UK news, unemployment is at the lowest level since 1974 (3.7%), which caused GBP/USD to have the largest one-day increase in 17 months. Markets reacted positively to the news that unemployment is lower than job vacancies for the first time on record. However, on Wednesday a sharp but brief GBP correction took place as CPI data showed that spending power reduced more than in any period on record. CPI is now 9% y/y, the highest level since 1982. Finally, a positive surprise for retail sales (+1.4% in April) provided some support to the UK currency on Friday, which resumed its uptrend and closed the week on a strong note.


Week ahead

Governor Bailey’s speech will be insightful to market participants wondering how an impending recession is going to impact BoE monetary policy.


Calendar

Monday 4:15pm | Governor Bailey Speech

Tuesday 8:30am | Production and services PMI (May)


US Dollar

The Dollar rally lost some steam last week.


Movements

EURUSD opened at 1.0415 and trended higher during the first part of the week. It the partly retraced on Wednesday before resuming the move higher and closing with a strong weekly gain of 1.76% at 1.0598.


GBPUSD opened at 1.2238 and progressively moved up. It recorded the biggest weekly increase so far this year (+2.68%) to close at a 2-week high (1.2566).


Movement rationale

The Dollar had a bad start to the week with the Euro and Pound gaining on Monday and Tuesday. US retail sales slightly beat expectations increasing 0.9% m/m in April, which the markets digested positively during Wednesday’s session. However, positive news from China improved market sentiment and reduced safe-haven demand, which started to penalise the Greenback. The announcement that Shanghai is set to ease restrictions in stages and an unexpectedly big rate cut in China were perceived as positive measures to help global growth. Also, expectations of more rapid monetary policy convergence in the Eurozone and UK are starting to reduce the appeal for the US currency, which registered its first weekly loss in nearly two months.


Week ahead

Market participants will be using the FOMC minutes as a guide for the Fed’s plans for further rate hikes.


Calendar

Tuesday 1:45pm | Manufacturing and services PMI (May)

Wednesday 12:30pm | Durable goods (Apr) 6pm | FOMC minutes

Thursday 12:30pm | GDP (Q1)

Friday 2pm | Michigan Consumer Sentiment Index (May)


Euro

The Euro recovered some ground against the Dollar.


Movements

EURUSD opened at 1.0415 and trended higher during the first part of the week. It the partly retraced on Wednesday before resuming the move higher and closing with a strong weekly gain of 1.76% at 1.0598.


GBPEUR opened at 1.1750 and initially shoot up to reach 1.1912 on Tuesday. The pair then erased all gains in the following 24 hours before appreciating again on Friday to close with a gain of 1.32% at 1.1855.


Movement rationale

On Monday Finland and Sweden announced plans to join NATO. However, acceptance into NATO requires unanimous support from members, and both nations may be refused by Turkey due to their historical relations with the Kurds. Then, on Tuesday geopolitical uncertainty increased further as president Zelensky announced Ukraine was withdrawing from Mariupol. Despite this, both GBP/EUR and EUR/USD seemed to react more to macroeconomic data than geopolitical events. Euro Q1 GDP (5.1%) came in slightly above consensus on Tuesday, showing Europe’s resilience to the energy shock so far and buoying EUR/USD. Inflation figures on Wednesday were in line with expectations (0.6%). Finally, the ECB minutes and speech from President Lagarde was a more hawkish stance than previously taken by the ECB. The markets have fully priced in a rate hike in July’s meeting which helped the Euro gain on USD. Due to the divergence of the central bank’s monetary policy up to now, if the ECB will act more aggressively than market expectations, there could be a resurgence of the single currency against GBP and USD in Q3/Q4 2022.



Week ahead

Investors will pay attention to PMI data this week, as a surprise to the upside may push the ECB to be more prone to hike rates in the upcoming meetings.


Calendar

Tuesday 8am | Manufacturing and Services PMI (May)

Wednesday 8am | EU Financial Stability Review


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