UK: Weekly FX Market Update 2 May

GBP

• This week could see some directional moves for the leading sterling currency pairs, with investors potentially being motivated by the Federal Reserve (Fed) and the European Central Bank (ECB) setting monetary policy.

• The market expects 0.25% rate hikes from both the Fed (Wednesday) and the ECB (Thursday) before the Bank of England (BoE) sets monetary policy on May 11th.

• Last week, UK inflation linked bonds received a record level of demand, possibly indicating that investors consider that inflation in the UK may be more difficult to reduce than elsewhere.

• Could these expectations push the BoE to hike for longer than the Fed and ECB?

EUR

• Eurozone preliminary GDP showed quarterly growth of 0.1%, better than last month’s flat reading.

• The German government also increased their 2023 GDP forecast to 0.4%.

• Eurozone CPI Flash estimate is released on Tuesday. If it is above the 7% expected, could this encourage the ECB to hike by 0.5%, rather than the 0.25% expected on Thursday?

• Bloomberg analysts also expect two further 0.25% rate hikes in June and July from the ECB, forecasting a terminal rate hike of 3.75%, closing the interest rate gap between the EU against the UK and USA.

USD

• The ailing First Republic Bank (FRB) has now been closed by US regulators, with the bulk of its assets bought by JP Morgan. Does this signal the end of the recent US Regional banking sector turmoil?

• Its worth noting that Fed emergency bank loans have risen from USD 144 billion to USD 156 billion in the last week, indicating further stress in the banking system.

• Wednesday sees the Fed setting interest rates, with the market expecting a 0.25% hike. However, the market also expects this hike to be the last of this cycle and for rates to drop to 4.5% by December 2023 - will this be the case?

• Standard Chartered go further and suggest that 'the banking system stress', mentioned above, will cause the Fed to pause its rate hike on Wednesday.

• With the US Dollar having been falling since September 2022, should the Fed pause, could this encourage more USD weakness?

• The week ends with the Non-Farm Payroll jobs data, will the US deliver another impressive number, strengthening the dollar?

Events for the week ahead:

Mon May 1

Bank Holiday UK/Italy/Spain/CNY

15:00 USD ISM Manufacturing PMI

Tue May 2

05:30 AUD Cash Rate/Statement

10:00 EUR CPI Flash Estimate

12:20 AUD RBA Gov Lowe Speaks

23:45 NZD Employment Data

Wed May 3

02:00 AUD Retail Sales

15:00 USD ISM Services PMI

19:00 USD FOMC Statement/Int Rate Decision

19:30 USD Press Conference

Thu May 4

13:15 EUR Interest Rate Decision/Statement

13:30 USD Trade Balance

13:45 ECB Press Conference

Fri May 5

09:30 GBP Construction PMI

10:00 EUR Retail Sales

13:30 USD Non-Farm Payrolls/Average Hourly Earnings/Unemployment Rate