UK: Weekly FX Market Update 30 May

GBP

• The market is contemplating where UK interest rates will peak, after UK headline inflation fell from 10.1% to 8.7%, and core inflation jumped higher to 6.8% from 6.2%.

• Higher interest rates usually mean a stronger currency, and yet GBPUSD fell nearly 1% after the inflation data was released. Could investors be worried about the UK experiencing stagflation?

• Bank of England Governor Bailey admitted the Bank got its inflation forecast wrong, and promises again to bring inflation down to 2%.

• Meanwhile, the IMF has changed its view on the UK economy, suggesting growth rather than decline. Does this provide the BoE with the bandwidth to continue hiking rates?

EUR

• EURUSD has been on the backfoot recently, despite the US Federal Reserve entertaining a possible rate pause in June, and the ECB continuing to suggest that more rate hikes are likely.

• Could the driver for the current Euro weakness be underpinned by the suggestion that all is not good with the German economy?

  • The German economy shrank in Q4 2022 by 0.5%, and then again in Q1 2023 by 0.3%, confirming it is now in recession.

  • China, Germany’s biggest export destination, is currently experiencing an unsteady economic expansion.

  • Whilst German business confidence fell last month after six months of gains.

• This week, the focus will be on Eurozone inflation. Will it fall below last month’s 7%? Will the ECB repeat their desire to get inflation back to 2%?

USD

• The US budget deficit negotiations are not a great advert for the politics of the country. A deal was agreed over the holiday weekend. Now it needs to be voted through Congress before June 5th with a vote this Wednesday, May 31st.

• If/when the budget deficit ceiling is raised, the US Treasury will need to replenish its coffers by some US Dollars 750 billion. Bloomberg estimates that this will have the same effect as raising rates by 0.25% -will this be good news for the dollar?

• Fed Chair Powell has been hinting at a possible June pause in rate hikes, though this is at odds with other Fed Presidents. What will they decide to do in June?

• The latest US GDP reading showed growth of 1.3%. Will Non-Farm Payrolls, due for release this Friday, continue the theme of positive US data?

Events for the week ahead:

Tuesday May 30

15:00 USD Consumer Confidence

Wed May 31

00:01 AUD RBA Gov Lowe Speaks

02:30 AUD CPI

07:00 EUR German Preliminary CPI

13:30 CAD GDP

17:30 USD FOMC Harker Speaks

Thu Jun 1

10:00 EUR CPI Flash Estimate

15:00 USD ISM Manufacturing PMI

18:00 USD FOMC Harker Speaks

Fri Jun 2

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