• Audere Research

Weekly FX Analysis ~ 07 February 2022


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GB Pound


Sterling hit a new 2-year high against the Euro before retracing heavily soon after.


Movements

GBPUSD opened at 1.3430 and steadily moved up during the first half of the week, reaching 1.3628 on Thursday. It then lost some ground on Friday but finished the week with an overall positive gain of 0.78% at 1.3535.


GBPEUR opened at 1.2027 and remained in a tight range until Thursday. Post BoE meeting, the currency hit a new 2-year high of 1.2038, but then declined sharply by 2%, and ended the week at a significant loss of 1.57% at 1.1838.


Movement rationale

With no material economic news, Sterling had a quiet start to the week. Activity then picked after Thursday’s BoE monetary policy decision. Despite a rise in political tensions in the UK, with the release of Sue Gray’s report and an on-going police investigation on Downing Street lockdown parties, there has been a limited currency reaction so far. As expected, the BoE raised interest rates to 0.5% during its policy committee, although nearly half of its policymakers voted for a bigger increase to fight the price pressures. The Pound entered in a high volatile session, briefly moving up to a 2-year high against Euro, before quickly reversing the movement after Mr. Bailey offered a decidedly more 'dovish' tone with regards to future rate hikes.


Week ahead

A thin economic agenda should maintain the investors’ focus on monetary policy expectations.


Calendar

Friday 7am | Gross Domestic Product (Q4-21), Industrial Production (Dec-21)



US Dollar


The Dollar fell heavily due to risk-on sentiment and less hawkish monetary policy.


Movements

EURUSD opened at 1.1165 and progressively moved higher, recouping all losses from the previous week, and hitting a 3-week high at 1.1483. It finally closed +2.4% at 1.1433.


GBPUSD opened at 1.3430 and steadily moved up during the first half of the week, reaching 1.3628 on Thursday. It then lost some ground on Friday, but finished the week with an overall positive gain of 0.78% at 1.3535.

Movement rationale

After the solid gains from the previous week, the Dollar sustained heavy losses in what was the largest weekly decline since November 2020. Some of the USD weakness can be attributed to dovish comments from a few Federal Reserve policymakers, which endorsed a less aggressive stance on monetary tightening after the rate hike expected during the March meeting. Also, a rally in the global equity markets diminish the allure in holding safe haven assets such as the Dollar. The US currency continued to fall later in the week on disappointing private payrolls, which recorded the biggest fall since the beginning of the pandemic. The Greenback eventually recovered from the two-week low on Friday after US Nonfarm Payrolls posted better-than-expected job figures, leaving the Federal Reserve on course to raise interest rates by 0.25% in March, with circa five hikes expected this year.

Week ahead

Inflation data released on Thursday will likely be one of the key USD drivers this week.


Calendar

Thursday 1:30pm | Consumer Price Index ((Jan), Initial Jobless Claims (Feb 4)

Friday 3pm | Michigan Consumer Sentiment Index (Feb)


Euro


The Euro posted its best weekly performance since March 2020 after ECB change of tone.


Movements

EURUSD opened at 1.1165 and progressively moved higher, recouping all losses from the previous week, and hitting a 3-week high at 1.1483. It finally closed +2.4% at 1.1433.


GBPEUR opened at 1.2027 and remained in a tight range until Thursday. Post BoE meeting, the currency hit a new 2-year high of 1.2038, but then declined sharply by 2%, and ended the week at a significant loss of 1.57% at 1.1838.


Movement rationale

Concerns over rising inflation in the Euro-zone, with the most recent data recording a 5.1% increase in January, put additional pressure on the ECB to take actions to curb price pressure. German 10-year yields hit its highest level since mid-2019, and a general rise in EU yields pushed the Euro higher during the first half of the week. On Thursday, Mrs. Lagarde fuelled expectations of faster policy tightening, acknowledging that the euro zone inflation is running higher than expected. The surprising hawkish turn by the ECB, triggered a fresh demand for the single currency, sending bond yields further up and increasing bets of a 10 bps hike in June to 80% (and an almost 100% chance of 40 bps of hikes by year-end). In terms of economic data, the bloc’s economy grew 0.3% in Q4-21, in line with market expectations, returning at its pre-pandemic level of output.

Week ahead

Mrs. Lagarde speech on Monday could offer more insights on the Euro-zone monetary policy guidance over the coming months, as investors will be closely pay attention to the ECB’s tone.


Calendar

Monday 3:45pm | ECB's President Lagarde speech




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