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Foreign Exchange Analysis ~ 31 July 2023


GB Pound

What happened last week?

Quiet markets allowed the pound to trade sideways ahead of this week’s Bank of England meeting.


What to watch for in the short-term?

Despite a pick up in wage increases, the recent dip in headline and services inflation should be enough to take the pressure off the Bank of England.


That being said, a 25bps increase is expected from the Monetary Policy Committee and we will be looking for three things to influence further sterling moves; how split the committee is on that level of tightening, whether they offer guidance on how much more may be to come and, if the Bank’s plans to increase its monthly reductions of UK government debt it is holding.


All will point to sterling volatility, it’s a matter of what time such moves takes place that markets will have to come to terms with.


What about the coming months? The peak in UK rates is now definitively below 6% and with some mortgage providers cutting rates to increase competitiveness we can but hope that, finally, we may be entering a period of economic calm, although that may not be reflected in markets.


Calendar


Thursday 12.00 BST | BOE Rate Decision


US Dollar

What happened last week? The dollar has maintained a level of persistent strength as global monetary policy and economic fundamentals have diverged. What to watch for in the short-term? The Fed is nowhere near guaranteeing a soft landing for the US economy and the likelihood of such an outcome will be tested by this week’s ISM reports as well as Friday’s jobs report. Even if the data is slightly weaker than expected, moves by some emerging market central banks to cut rates in the coming week – Chile, Brazil etc – should allow for a level of USD strength. In the longer term, this should allow for EM currency strength and dollar weakness as growth prospects outside of the US increase although there is always the chance that rates are cut too quickly. What about the coming months? If we move into a world wherein rates are merely held at these highs as opposed to cut to stimulate growth, we can see dollar outperformance remaining. Calendar Friday 13.30 BST | US Jobs Report


Euro

What happened last week?

EURUSD is back below 1.10 despite weaker data in the US.


What to watch for in the short-term?

Data hot off the press this morning suggest that the ECB will continue to remain optimistic on the European economy heading into the Autumn. GDP beating expectations and inflation failing to rise by as much as economists had forecast is a Goldilocks level of progress that will allow the central bank to push rates higher but without scaring those forecasting a recession in the Eurozone.


As already noted, a weak employment picture in the US was not enough to drag EURUSD back above the 1.10 level and we may need to see both strong European data and weak news in the States for that level to be surpassed again.


What about the coming months? Expectations for the ECB deposit rate at year-end have dipped from 3.95% to around 3.83% and while lower than equivalent readings in the US and UK, should allow for EUR strength to persist.


Calendar

Thursday 09.00 BST | European Manufacturing PMI

Thursday 09.00 BST | European Services PMI




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