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  • Audere Research

Foreign Exchange Analysis ~ 3 January 2023

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GB Pound

What happened last week? Sterling spent the Christmas week with its feet up although has begun the new year lower against the USD. What to watch for in the short-term? The news flow in the UK is unfalteringly negative at the moment with investors both at home and abroad focused on the impact of industrial action on growth and productivity. Currencies are tipped to trade increasingly on growth differentials in the coming months and a UK recession would be exacerbated by further strikes in key infrastructure such as rail and the health service. Political pressure on the Sunak administration may also exert downward pressure on sterling.

What about the coming months? 2023 poses a lot of questions for the UK government funding and, in particular, who keeps buying UK debt if the Bank of England isn’t the main buyer via a QE program? Calendar Thursday 09.30 GMT | Services PMI Friday 09.30 GMT | Construction PMI


US Dollar

What happened last week?

Dollar held up over the Christmas break as investors repatriated USD ahead of tax deadlines.


What to watch for in the short-term?

The broad consensus in markets remains that while the USD is overvalued, that overvaluation will continue into 2023.


If inflation remains sticky and the Federal Reserve continues its recent messaging then it will be difficult to carve out gains against the USD in the coming months.


Poor Covid news out of China should also keep the USD in the box seat as winter develops in the northern hemisphere.


What about the coming months? An US recession is likely coming, the key dynamic remains how deep it is and how it compares to recessions elsewhere.


Calendar

Wednesday 19.00 GMT | Fed minutes

Friday 13.30 GMT | US Non-Farm Payrolls

Euro

What happened last week? Thin markets allowed EURUSD to trade close to a 7 month high above 1.07. What to watch for in the short-term? Last month's bullish news from the European Central Bank has naturally brought memories back to 2007 and the strong rally of EURUSD heading into the Global Financial Crisis. The Fed had finished hiking rates in the summer of 2006 while the ECB needed to catch up but was only able to get to 3.25% by mid-2008; increasing rates whilst growth fundamentals were wobbling.

We are in a similar situation currently at a time where the Eurozone’s external funding position is having to battle higher energy costs. The warm end to the year and the unseasonably warm forecasts through most of January will be helping matters however. What about the coming months? Growth differentials will be crucial for the Euro as higher growth will allow markets to see rate rises by the ECB as appropriate and not a mistake for longer. Calendar Thursday 10.00 GMT | Italian Inflation Friday 10.00 GMT | Eurozone Core CPI



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