• Audere Research

Foreign Exchange Analysis ~ 9 May 2022

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GB Pound

Revisions to the outlook for UK economic growth by the BoE meant GBP suffered heavy losses against USD and EUR.


Movements

GBPUSD opened at 1.2551 before a volatile mid-week. On Wednesday the pair traded above 1.26 before hitting a 10-month low at 1.2257 this Monday morning, to close at 1.2295 for a weekly loss of -2.04%.


GBPEUR opened at 1.1929, dropping consistently throughout the week to 1.1646 on Friday, the lowest level in 5 months. It then slightly recovered to close at 1.1675 for a heavy weekly loss of (-2.13%).


Movement rationale

With all eyes on interest rates announcement in UK, US and Australia later in the week, the PMI print on Tuesday (which improved slightly last month compared with a five-month low recorded in March) did little to move the Pound. However, the ongoing backdrop of deteriorating global investor sentiment left Sterling under pressure, losing some ground against main rivals during the first part of the week. Like the Fed, all BoE members voted to raise rates with 3 even voting for a 50bp hike. However, this was not enough to sway markets into buying the Pound due to the new information regarding economic growth. The BoE now predicts inflation to reach 10% by the end of 2022 and the economy to contract 0.25% in 2023. Two consecutive quarters of negative GDP predictions lead Governor Bailey to announce, “a recession is a nailed-on certainty”. Consequently, despite a strong interest rate vote, due to fears over stagflation, investors sold off the UK currency, which hit the lowest levels against USD and EUR since June 2020 and December 2021 respectively.


Week ahead

Due to the BoE’s bleak projections for economic growth, market participants will place importance on economic growth over the coming months. Expect volatility if this Thursday’s GDP data surprises to the downside.


Calendar

Monday 2pm | Saunders speech

Thursday 7am | GDP (Q1) | Manufacturing Production (Mar)


US Dollar

The Dollar suffered a dovish repricing after the FOMC meeting on Wednesday, but losses were soon reversed as risk sentiment deteriorated.


Movements

EURUSD opened at 1.0521 before spiking on Wednesday to 1.0640. These gains were sharply reversed on Thursday, briefly breaking below 1.05 at 1.0470, the lowest since January 2021. Volatility then continued through to the end of the week with the pair closing broadly unchanged at 1.0528.


GBPUSD opened at 1.2551 before a volatile mid-week. On Wednesday the pair traded above 1.26 before hitting a 10-month low at 1.2257 this Monday morning, to close at 1.2295 for a weekly loss of -2.04%.


Movement rationale

The Dollar was somewhat steady in the first half of last week. Although ISM manufacturing data on Monday was a surprise to the downside, it did little to move the Greenback. Following the interest rate announcement on Wednesday, the US currency posted heavy losses against the Pound and Euro. The 50bp hike was the largest increase in interest rates since 2000. Alongside this hawkish vote, the balance sheet runoff program was also a display of decisive monetary policy tightening. However, rather than signalling a rush toward the Dollar, there was a selloff as investors negatively digested Fed Chair Jerome Powell stating that “75 basis point increase is not something the committee is actively considering”. The USD then bounced back on Thursday, hitting a 20-year high against a basket of currencies as market sentiment deteriorated once more, sending stocks lower and boosting demand for the safe-haven currencies. A strong employment report released on Friday, revealing that the US added slightly more jobs than expected in April, provided further support to the Dollar toward the end of the week.


Week ahead

Market participants may use last week’s interest rate news as fuel for further volatility during the week ahead. Budget statements, consumer sentiment prints, and geopolitical developments could also lead to volatile FX markets.


Calendar

Wednesday 1:30pm | CPI (Apr) 6pm | Monthly budget statement (Apr)

Thursday 1:30pm | Initial Jobless Claims (May 6)

Friday 3pm | Michigan Consumer Sentiment Index (May)


Euro

The Euro recovered some ground against the Sterling, reaching a new 2022 low.


Movements

EURUSD opened at 1.0521 before spiking on Wednesday to 1.0640. These gains were sharply reversed on Thursday, briefly breaking below 1.05 at 1.0470, the lowest since January 2021. Volatility then continued through to the end of the week with the pair closing broadly unchanged at 1.0528.


GBPEUR opened at 1.1929, dropping consistently throughout the week to 1.1646 on Friday, the lowest level in 5 months. It then slightly recovered to close at 1.1675 for a heavy weekly loss of (-2.13%).


Movement rationale

With monetary policy hawkishness in US and UK already priced in the Dollar and Pound, the Euro managed to close the week broadly unchanged against the Dollar, while posting big gains versus the Pound, as investors start to be concerned about recession risk. The Eurozone had a heavy economic calendar, releasing confidence and unemployment figures among other data. On Monday, consumer confidence rose from -18.7 to -16.9 in April while price expectations reached a new all-time high. On Tuesday unemployment dropped to 6.8% just missing the consensus (6.7%). On Wednesday, retail sales surprised expectations dropping sharply. All these data compounds into ever-increasing fears of eurozone stagflation which may resume the Euro downtrend in the coming weeks.


Week ahead

The euro may compound the gains made against the pound next week if progress is made between Ukraine and Russia.


Calendar

Tuesday 9am | Economic Sentiment (May)

Friday 9am | Industrial Production (Mar)


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