UK: Weekly FX Market Update

GBP

• The Pound benefited more from the weakening of other currencies, rather than from positive themes relating to the UK economy.

• GBP/EUR gained by around 2% as Russian gas supplies to Germany were again restricted. GBP/USD finished the week higher following the Federal Reserve decision on Wednesday.

• This week the main focus for Sterling will be the Bank of England interest rate decision on Thursday.

Bank Governor Bailey has stated that a half-point interest rate rise is ‘on the table’ and his sentiments have been echoed by other Monetary Policy Committee members. It will be a tricky decision for the Bank because even though inflation is 9.4%, and expected to continue to rise this year, the outlook for the UK economy is looking challenging. Will a rate hike undermine the potential for growth of the UK economy?

Turing to politics, the field of candidates for the next PM was reduced to two: Rishi Sunak and Liz Truss. Whilst the hustings and canvassing within the Tory party has another 6 weeks to run – it’s worth noting that Citigroup described a potential premiership of Truss as having the ‘greatest risk’ to the UK economy from the original 11 Conservative contenders. She intends to cut taxes, as well as possibly to interfere in the Bank of England’s independence, and if elected as Prime Minister, the possibilities of a more contentious relationship with the European Union are possibly increased.

EUR

• The Euro weakened earlier this week when the Russian gas supplies to Germany were turned back on; however, at reduced capacity of just 20%.

• Despite Goldman Sachs, Credit Suisse and Deutsche Bank all announcing that the Eurozone was now in a recession, the Euro did manage to halt its recent declines against the U.S. dollar.

• This week we look to Wednesday’s retail sales release for direction, as well as the ECB economic bulletin on Thursday, and German industrial production announced on Friday.

• We also look for news on the impending Italian election and the new Transmission Protection Instrument which is being designed to managed yield spreads between Eurozone countries.

• Last week Nomura were quite vocal in their views on EUR/USD as they called for 0.9500 by the end of August.

USD

• The Federal Reserve hiked rates by the expected 0.75% on Wednesday.

• A surprise to the markets was the decision to end forward guidance; this has been seen by many as the reason for the USD sell off.

• On Thursday, advance GDP estimates then showed a quarterly decline of 0.9%, technically putting the US economy into recession – though US Treasury Secretary Yellen classed this as ‘a slowdown’.

• The main data release next week is the important Non-Farm payrolls on Friday.

Fed Chair Powell last week started his press conference in similar vein to recent meetings, as he spoke about ongoing rate hikes being ‘appropriate’ and that they are still ‘highly attentive’ to inflation risks. He then departed from the recent script and said that ‘as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation.’ He also announced a departure from their policy of forward guidance. The market took the change to forward guidance as a signal that US rate hikes could start to slow and bought US equities and sold the dollar.

RoW

• With the slight change to US monetary policy announced by the Fed last week, USD/JPY fell 4% in 48 hours as the market sold US dollars that they have been buying since March, when USD/JPY was 115.00.