UK: Weekly FX Market Update 20 February

GBP

• The relatively divergent paths of UK and US CPI encouraged weakness in GBPUSD last week. The weakness, however, was not sustained and price closed the week where it opened.

• UK CPI was released at 10.1%, lower than expected, adding weight to the Bank of England being towards the peak of its rate hiking cycle.

• Meanwhile, UK average earnings were higher than expected.

• In the background PM Sunak is possibly renegotiating the N.Ireland protocol. Can the market continue to ignore this good news should it come to fruition?

If the markets focus is on the potentially ‘higher for longer’ US interest rates, is this the reasoning behind JP Morgan’s GBPUSD forecast of 1.1500 for December 2023?

EUR

• The ECB hawks were out in force last week .

• ECB’s Schnabel said ‘Under all scenarios, a 0.5% rate hike in March is very much needed’.

• Following these comments, Bloomberg reported a peak interest rate of 3.75% for the eurozone, 1.25% higher than the current 2.5%.

• The European Union now expects the economy to avoid recession and grow 0.8% in 2023.

Will the important ZEW economic sentiment, released this week, confirm this new positive view on the Eurozone economy?

Can Eurozone final CPI on Thursday make the hawks screech even more loudly?

USD

• The US$ had a torrid time in Q4 2022. Losing 11% of its value as inflation fell & China re-opened.

• The market had been pricing in a 0.25% rate cut by the Fed in Q3 2022.

• However, as inflation has been higher than expected in January, and as FOMC members warn of higher rates, the US$ Index has gained 4% in February so far.

• The US economy is printing strong data, with 500k jobs added in January and Retail sales jumping the highest in nearly two years in January.

Can the US$ recovery continue, supported by a growing economy & the expectation of higher interest rates?

Events for the weekend ahead:

Mon Feb 20

US All Day holiday (Presidents day)

CAD All day Holiday

Tue Feb 21

07:00 GBP UK Public sector Net Borrowing

09:00 EUR Flash Services/Manufacturing PMI

09:30 GBP Flash Services/Manufacturing PMI

10:00 EUR German ZEW Economic Sentiment

13:30 CAD CPI/Retail sales

14:45 USD Flash Services/Manufacturing PMI

Wed Feb 22

00:30 AUD Wage price Index

09:00 EUR German IFO Business Climate

19:00 USD FOMC Meeting minutes

Thu Feb 23

10:00 EUR Final CPI

10:45 GBP MPC Cunliffe Speaks

13:30 USD Prelim GDP

Fri Feb 24

13:30 USD Core Personal Consumption Expenditure Price Index

15:00 USD Revised UoM Inflation Expectations