UK: Weekly FX Market Update 26 June

GBP

• Last week’s Inflation data release showed Core CPI still growing, from 6.8% to 7.1% on an annual basis.

• The Bank of England (BoE) reacted by hiking interest rates from 4.5% to 5%. The 13th consecutive rate hike.

• Money market traders now bet that the BoE will hike rates to 6.25%. (Source Bloomberg).

• However, sterling struggled to move higher on this news, with the market trying to decide which narrative to adopt.

• Buy sterling as interest rate hikes support it. Or sell sterling as the chances of a recession increase?

• With GBPUSD and GBPEUR both lower at the close on Friday than the start of the week, it could be suggested that the recession fear for the UK is now the potential biggest driver of the pound in the short term.

• BoE Governor Bailey Speaks on Wednesday, Nationwide HPI is released Thursday and revised GDP is announced on Friday.

EUR

• EURUSD was quietly gaining as the market focused on the difference between the US Federal Reserve (Fed) pausing interest rates and the European Central Bank (ECB), who continue to hike.

• However, will the rally be sustainable bearing in mind there were separate Eurozone and German PMI data which disappointed?

• All eyes will turn back to future interest rate hikes when ECB President Lagarde speaks on Monday and Wednesday.

• In addition, Eurozone Flash estimate CPI is released on Friday. Last month’s reading was 5.3%, will it prove to be ‘sticky’ supporting further ECB action?

• EURUSD has been trading in a tight range of 1.0635 to 1.1095 for two months – which way will it eventually break?

USD

• Fed Chair Powell spelt out to Congress last week what he considers going forward, stating that it will be ‘appropriate to raise rates two more times this year’.

• Despite this clear instruction, the market (Bloomberg) gives a US interest rate peak level of 5.3%, even though rates now sit at 5.25%. Does this mean that future hikes will strengthen the USD if not currently priced in?

• Fed Chair Powell speaks again on Wednesday and Final GDP is out on Thursday. What will month end bring? Will the market listen to Powell and buy USD?

Events for the week ahead:

Mon Jun 26

09:00 EUR German IFO Business Climate

18:30 EUR ECB President Lagarde Speaks

Tue Jun 27

09:15 GBP MPC Dhingra Speaks

13:30 CAD CPI

13:30 USD Durable Goods

15:00 USD Consumer Confidence

Wed Jun 28

Tentative Bank of England Quarterly Bulletin

02:30 AUD CPI

11:30 GBP MPC Pill Speaks

13:30 USD Goods Trade Balance

14:30 EUR ECB President Lagarde/BoE Gov Bailey/Fed Chair Powell Speak

16:00 EUR ECB President Lagarde Speaks

Thu Jun 29

All Day Italian Bank Holiday

07:00 GBP Nationwide House Price Index

09:00 EUR German Preliminary CPI

13:30 USD Final GDP/Unemployment Claims

Fri Jun 30

07:00 GBP Current Account/Final GDP/Revised Business Investment

10:00 EUR CPI Flash Estimate

13:30 CAD GDP

15:00 USD Revised UoM Consumer Sentiment