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Foreign Exchange Analysis ~ 27 March 2023


GB Pound

What happened last week?

Sterling traded quietly despite the Bank of England raising interest rates by 25bps.


What to watch for in the short-term?

The Bank of England meeting was enough to keep sterling supported through the week. With the meeting however not having a press conference, appearances by BOE Governor Bailey today and tomorrow will be scoured for further hints on rates.


The overall effect is likely to see focus fall increasingly on the data from the UK economy. Higher inflation and higher wages are likely to point to higher interest rates regardless of what is happening in the wider context of the British economy. The prospect for sterling gains is limited in this context however with those hikes already part of the price.


What about the coming months? With bank bankruptcies in both Europe and the US it makes sense that GBPUSD is more governed by USD risk at the moment whilst GBPEUR is also more focused on the euro. We expect that to continue.


Calendar

Friday 07.00 BST | UK Q4 GDP


US Dollar

What happened last week?

The dollar sold-off mid-week as the Fed raised rates by 25bps, as expected, but took a cautious stance on the outlook due to current financial turmoil. However, the currency then recovered driven by haven buyers looking for safety from headlines surrounding bank risk both in the US and EU.


What to watch for in the short-term?

Market pricing of US interest rates have almost done a full 180 degree turn in the past few days. A few weeks ago there were real doubts whether the Fed was in a position to cut rates by the end of the year. Now, following the declines of Silicon Valley Bank and Credit Suisse, Fed funds futures currently price in only a 30% chance of a rate hike in May while fully pricing in a 25bp cut in July, and a total of 80bp of easing by year-end.


This will play in to a belief that the dollar can and maybe should weaken from here as long as counterparty risk disappears from immediate concern.


What about the coming months? Data from the US economy continues to lead the industrialised world but if markets want a full credit meltdown, there’s not much a strong jobs market can do.


Calendar

Thursday 13.30 BST | US PCE

Friday 15.00 BST | US Consumer Confidence


Euro

What happened last week? Credit Suisse risk was dealt with pretty succinctly by Swiss and European regulators but wobbles around Deutsche Bank on Friday saw concerns return. What to watch for in the short-term? There is no escaping the concerns around the European banking sector in the aftermath of the Credit Suisse collapse. Speculators’ targeting of Deutsche Bank last week may be enough to keep the single currency under pressure in the coming weeks. Data from the German economy this morning has shown a strong level of economic confidence in the nation’s businesses. Bolstering growth expectations locally. What about the coming months? The coming months will be ruled by how quickly the world returns to speaking about data and not bank deposits. Nobody can realistically tell you when that will be but, given the data from the Eurozone remains solid, EUR outperformance could easily be seen. Calendar Wednesday 07.00 BST | German Consumer Confidence






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