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Foreign Exchange Analysis ~ 26 June 2023


GB Pound

What happened last week?

The Bank of England hiked rates by the 50bps – double the market consensus although sterling failed to capitalise.


What to watch for in the short-term?

The Bank of England decision came as a surprise to markets but the inflation picture gave policymakers the leeway to really push on the base rate.


While the Bank can play with rates the issue remains within the UK that fiscal tightening – higher taxes – may be needed in concert with higher interest rates. We do not expect the current government to help however.


Inflation data evidently holds the key to sterling progression in the coming months and price components of next week’s PMIs are the next look at how prices are affecting businesses and consumers.


What about the coming months? The mortgage and rental market is a focus for UK watchers through the summer expecting further support to help both consumer confidence and the pound


Calendar

Friday 07.00 BST | UK GDP


US Dollar

What happened last week? Russian newsflow on Friday failed to generate USD outperformance on haven buying. The issue remains far too vague for market participants to commit capital. What to watch for in the short-term? With inflation being so front and centre globally, it makes sense that the Fed’s preferred measure of price pressures, released this coming Friday will dominate proceedings. PCE is expected at 0.4% and anything higher than that will not allow the Fed to pull its language away from additional rate hikes. The dollar may still struggle versus the pound and the euro in the coming weeks given communications from their respective central banks. What about the coming months? USDJPY is one pair that will likely continue to trade in the dollar’s favour given the mismatch in policy terms between Washington and Tokyo alongside continued hopes of a recession-less year. Calendar Wednesday 14.30 BST | Chair Powell speech Friday 13.30 BST | US PCE


Euro

What happened last week?

EURUSD dipped towards the end of the week as a poor set of European services data dented confidence.


What to watch for in the short-term?

The narrative in central banking circles that rates in developed market economies are going to be higher for longer than had previously been expected is not especially positive for the single currency.


That being said, the noises from Frankfurt of at least higher rates at the next two ECB meetings has allowed EURUSD to maintain a level of value around 1.09.


What about the coming months? Can the euro make a decisive move above 1.10? We think so, but we will need a sign that the US rate hike cycle is petering out soon, alongside a soft landing on growth.


Calendar

Thursday 11.00 BST | German Inflation




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