UK: Weekly FX Market Update 23 January

GBP

• Last week, UK Average earnings rose by 6.4% YoY, whilst inflation dropped from 10.7% to 10.5% YoY.

• ONS suggested that consumers cut back on their Christmas shopping due to affordability concerns, as Retail Sales declined by 1% MoM.

• This week Public Sector Net Borrowing is released for the UK.

Bank of England Governor Bailey stated that the UK’s expected recession is likely to be long but ‘shallow’. This is despite UK GDP data, which now suggests that the UK might have avoided a recession in 2022. He also stated that inflation in the UK is expected to fall ‘quite rapidly’, as early as late spring.

With the next Bank of England rate decision on 2nd Feb, and following a 3-way voting split at the last meeting, which route will the BoE take?

Does it follow its current path, taking comfort that a recession has been avoided and continue hiking, or does it feel that enough monetary loosening has been actioned already?

The pathway for sterling for 2023, could be set by the stance in next Thursday’s meeting.

EUR

• The ECB keeps repeating the mantra – ‘Higher interest rates are coming’.

• ECB President Lagarde said inflation is ‘way too high. And that the ECB will ‘stay the course’.

• ECB Board member Knot said that the ECB is planning to hike rates by 0.5% ‘multiple’ times.

If the above suggestions come to fruition, could we see the interest rate differential between the euro and the pound and USD narrow, providing a platform for euro strength?

The French bank, Société Générale, which late last year said that the euro was ‘unbuyable’, changed stance last week by saying that if the ‘energy crisis is over & European recession melts away’, EURUSD can head to 1.2000.

USD

• Fed Vice Chair Brainard cautioned that it would take time to get inflation down to the Fed's 2% target.

• US Treasury Secretary Yellen announced ‘extraordinary measures’ to keep paying federal government bills after it had reached its $31.4 billion debt ceiling.

• US PPI fell 0.5% last month and retail sales fell 1.1%, but core CPI is still firm at 5.69%.

• US Advance GDP is released on Thursday.

RoW

• The Bank of Japan maintained its ultra-easy monetary policy last week.

• USDJPY strengthened by 1%, but the strength was short-lived. Does the market suspect that the BoJ will change policy soon?

• The BoJ said that it will tighten its monetary policy when demand pull/wage inflation is seen.

• BoJ Governor Kuroda leaves his post on April 8th. Could the market be right and his successor tighten policy, encouraging yen strength?

Events for the weekend ahead:

Mon Jan 23

17:45 EUR ECB President Lagarde Speaks

Tue Jan 24

07:00 GBP Public Sector Net Borrowing

09:00 EUR Flash Reading Manufacturing & Services PMI

09:30 GBP Flash Reading Manufacturing & Services PMI

14:45 USD Flash Reading Manufacturing & Services PMI

Wed Jan 25

00:30 AUD CPI

15:00 CAD Bank of Canada Interest Rate Decision/Statement

16:00 CAD Bank of Canada Press Conference

Thu Jan 26

13:30 USD Advance GDP/Durable Goods/Goods Trade Balance

Fri Jan 27

13:30 USD Core PCE