Foreign Exchange Analysis ~ 9 January 2023
What happened last week? ↑ Both GBPUSD and GBPEUR remained rangebound although movements on Friday pushed both towards the top of the range. What to watch for in the short-term? ↓ Market pricing for the Bank of England base rate through this year suggests a 100bps increase is still fully priced in by Summer. Whilst this may come to pass, we can easily foresee periods when the economic data calls into question the wisdom and necessity of such a move, likely denting sterling in the process. The economics of the UK remain less stable than that of the Eurozone or US and movements in the labour market by unions and the government will continue to undermine growth efforts as Q1 develops. What about the coming months? ↓ Inflation looks set to have peaked although any gains in core inflation and wages could trigger further sterling buying. Calendar Friday 07:00 GMT | GDP Friday 07.00 GMT | Industrial Production
What happened last week? ↓ Friday’s negative ISM reading from the US services industry highlighted an increased recession risk in the States, weakening the USD. What to watch for in the short-term? ↓ While the US jobs market remains strong heading into 2023, fears over confidence or the lack thereof in the US services sector has brought US short-dated yields lower, returning the yield curve to its normal state of higher longer-term rates than those in the immediate future. This is normally a clear sign of dollar weakness and puts the hawkishness of the Fed in the spotlight ahead of an important inflation reading on Thursday. What about the coming months? ↑ Trends in USD/EM of stronger Asian currencies have developed well in 2023 so far and will closely tied to the moves in equities and commodities. Calendar Tuesday 14.00 GMT | Fed Chair Powell speech Thursday 13.30 GMT | US CPI
What happened last week? ↑ EURUSD has recovered towards 1.07 having hit a low of 1.0480, courtesy of the market’s negative reaction to the US jobs numbers on Friday. What to watch for in the short-term? ↓The evolution of the euro through the early part of this year remains closely pinned to two things; the weather and the conviction of markets towards the ECB’s desire to raise rates. One is uncontrollable, the other much more so. The ECB is battling the hawkishness in the US with its own version and that is helping the single currency although we expect markets will become more circumspect in the coming weeks, limiting the potential for euro outperformance. What about the coming months? ↓ 2023 is a busy year electorally in the EU with major votes in Poland, Spain, Germany and the Netherlands. Cost of living pressures could easily trigger higher vote shares for more unpredictable, fringe elements. Calendar Wednesday 09.00 GMT | Italian Retail Sales Friday 10.00 GMT | Eurozone Industrial Production
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