UK: Weekly FX Market Update 6 February

GBP

• The pound fell 2.75% against the US$ and 2% against the Euro last week, despite the Bank of England (BoE) hiking interest rates by 0.5%.

• BoE Governor Bailey said inflation had ‘started to turn a corner’.

• BoE Economist Pill added on Friday that he had ‘high confidence inflation will fall through the second half of this year’ and that he ‘sees inflation back at 2% in the middle of 2024’. He continued that the Bank ‘must guard against doing too much on rates’.

• Deutsche bank considered that the BoE was now only 0.25% away from the terminal/peak rate expected for UK interest rates.

UK data is very much in the spotlight this week. Construction PMI is released on Monday, BRC retail sales on Tuesday, monetary policy report hearings are on Thursday and we have a ‘data dump’ on Friday with GDP, Industrial production and preliminary business investment all due for release.

Bank of England members Mann and Pill both speak on Monday, Ramsden on Tuesday, and Pill speaks again on Friday.

EUR

• The ECB hiked interest rates by 0.5% and also signalled that they would raise rates by 0.5% at their next meeting in March.

• This came after the first estimate of Eurozone CPI was released at 8.5% with core inflation at 5.2% and above the 5.1% expected.

• ECB Lagarde again said that the ECB would ‘stay the course’, on inflation – a nod to further rate hikes.

• ECB’s Wunsch added on Friday that if core inflation remains persistent, a 3.5% terminal rate is the minimum.

• EURUSD had managed to trade briefly at the psychologically important 1.1000 for the first time since April last year, but slipped lower at the end of the week.

USD

• The Federal Reserve had been expected to hike interest rates by 0.25% on Wednesday and they duly did.

• The accompanying statement added that ‘inflation has eased somewhat but remains elevated’ and continued that ‘ongoing increases in the target range will be appropriate’ .

• Fed Chair Powell sounded as hawkish as he could by adding that the FOMC is ‘talking about a couple more rate hikes to a restrictive level’.

• If this is the case, the peak terminal rate could get to between 5% & 5.25%.

• Current Bloomberg expectations of the terminal rate are 4.9% in June 2023.

• The week ended with US jobs data providing a boost to the US$. Jobs added to the US economy were 517k and 2.5 times the 195k expected. The unemployment rate fell to 3.4%. However, the figures are compared with a year ago when the US was emerging from covid, so analysts are urging caution here.

• For the week to come Fed Chair Powell speaks on Tuesday.

Events for the weekend ahead:

Mon Feb 6

08:40 GBP MPC Mann Speaks

09:30 GBP Construction PMI

10:00 EUR Retail Sales

17:00 GBP MPC Pill Speaks

Tue Feb 7

00:01 GBP BRC Retail Sales

03:30 AUD Cash Rate/Rate Statement

07:00 EUR German Industrial Production

09:00 GBP MPC Ramsden Speaks

13:30 USD Trade Balance

17:00 USD Fed Chair Powell Speaks

17:45 CAD BoC Macklem Speaks

Wed Feb 8

14:15 USD FOMC Williams Speaks

Thu Feb 9

09:45 GBP Monetary Policy Report Hearings

10:00 EUR EU Economic Forecasts

Fri Feb 10

00:30 AUD RBA Monetary Policy Statement

01:30 CNY CPI

07:00 GBP GDP/Prelim GDP/Goods Trade Balance/Industrial Production/Prelim Business Investment

11:00 GBP NIESR GDP Estimate (Estimated Release Time As Well)

13:30 CAD Employment Data

14:00 GBP MPC Pill Speaks

15:00 USD Prelim UoM Consumer Sentiment

17:30 USD FOMC Waller Speaks