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Foreign Exchange Analysis ~ 06 March 2023


GB Pound

What happened last week?

Without much support from data, sterling traded lower against both the euro and US dollar throughout the week establishing multi-week lows.


What to watch for in the short-term?

When the most important thing that has happened in recent weeks is a back and forth over the trading rules for businesses in Northern Ireland then you could be forgiven for thinking that there is little out there to support sterling.


You’d be right.


We would expect the coming weeks to see sterling trade largely at the whim of the larger data releases coming from the United States and the Eurozone. BOE speakers due in the coming days are unlikely to upset the apple cart.


What about the coming months? Softening confidence in both manufacturing and services sectors doesn’t necessarily mean lower activity levels but the correlation is strong. Lower growth with stickily high inflation and rising rates is not a good outlook for the pound.


Calendar

Friday 07.00 GMT | UK Index of Services

Friday 07.00 GMT | UK Trade Balance


US Dollar

What happened last week? US data continues to show that the US economy is leading the way with strong growth and higher inflation. What to watch for in the short-term? This Friday’s payrolls data will either confirm or refute the monster number at the beginning of February and whether such growth was purely seasonal or the foundations of a truly astounding rebound. Fed Chair Powell speaks both on Tuesday and Wednesday this week and markets will be looking to see whether his thoughts are enough to substantiate bets that the Fed will pick up the pace of hikes to 50bps from 25bps at the March meeting. We see little reason at the moment for investors to be taking on the greenback. What about the coming months? Until the data shows a reason for dollar bulls to trim bets then we have to anticipate a USD that sits at the top of the G10 tree. Calendar Wednesday 13.30 GMT | US Non-farm payrolls


Euro

What happened last week?

Rate hike expectations within the Eurozone managed to keep EURUSD above the 1.05 level with future pricing likely to keep that as a base for now.


What to watch for in the short-term?

With rates in the Eurozone now almost certain to rise by 50bps at the March meeting, pricing differentials must return to the outlook for the rest of the year. Currently that sits at a further 150bps higher – a terminal rate of 5% - which looks incredibly aggressive given other factors at play in the Eurozone currently.


In the short term, as noted above, this should act as a stabilising influence on the euro, especially against a dollar that looks resurgent.


What about the coming months? European corporates are starting to report that while core inflation remains at high levels, the turning point is near. A couple of months of falling price pressures will confirm that pressures on businesses are lessening but we are a way away from that currently.


Calendar

Wednesday 07.00 GMT | German Retail Sales





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