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Foreign Exchange Analysis ~ 27 February 2023


GB Pound

What happened last week?

UK consumer confidence was shown to have remained resilient into the first months of 2023 backing up strong retail spending over Christmas


What to watch for in the short-term?

Will we have a new deal on Northern Ireland soon? Probably, although the anticipated impact on the UK economy and the pound is likely minimal given the continued difficulties that UK businesses face when trading with the European Union.


In the short term, the focus for the pound remains the macro-economic picture as seen by the rate setters at the Bank of England. For now, confidence in the UK economy will likely see one further rate rise in March.


What about the coming months? Next month will see Chancellor Hunt announce a Budget, something that most people will be looking to contain continued support for household energy bills. While the support has been less than in some European countries, it is also set to stop earlier despite the need for continued government assistance.


Calendar

Friday 09.30 GMT | UK Services PMI


US Dollar

What happened last week? US bonds are lower and the dollar remains on a firm footing as the data from the US economy has remained very hot. What to watch for in the short-term? Friday’s release of inflation data has everyone coming round to our belief that higher interest rates are going to be more persistent than previously believed. What this means for those of us in currency is a stronger dollar, and greater forward points when transacting on future hedges.

With this in mind, equity markets and currencies tied to commodities are likely in for a tough time with investors focused on higher rates. What about the coming months? The January ISM data that started this whole bull run was said to have been overly strong on seasonal weather quirks. This Friday sees the next iteration of this report and a chance for the strength to be confirmed or amended. Calendar Wednesday 15.00 GMT | US Services ISM



Euro

What happened last week?

EURUSD hung around the low levels of 1.06 last week before breaking through to the 1.05s this morning.


What to watch for in the short-term?

The ECB continues to hammer out a hawkish rhetoric to all that will listen. While all are listening, most remain unlikely to maintain euro buying given weakness in some indicators like we saw through German GDP last week.


It makes sense that the ECB will likely hike rates and hold them at their peak for longer than most other central banks so euro strength may come thorough but it is unlikely too soon.


What about the coming months? With the anniversary of the Russian invasion of Ukraine taking place last week, continued focus on economic fundamentals are likely to show a continent that is in a far better position than most were expecting 12 months ago.


Calendar

Wednesday 08.55 GMT | German Unemployment



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