RedFX Update: Central Bank meetings to dominate this week

This week’s US Fed, ECB and Bank of England policy meetings will set the tone for currency markets in the medium term. Another round of rate rises is predicted, but the messaging will be key.

Main Events of this week:

USD:

Markets are predicting just a 0.25% rise from the US, having previously anticipated a 0.5% hike. This expectation has seen the USD weaken over the past weeks – GBP/USD back firmly above 1.2250 and EUR/USD pushing highs at 1.0875. The reason for this has been a string of data suggesting that the US Fed may have tempered inflation without causing too much economic pain. On Friday the US annual Core Personal Consumption Expenditures (PCE) Index fell to 4.4% in December from 4.7% in November. Some commentators are suggesting that rates in the US will start to fall in the 2 nd half of 2023 which will continue to soften the USD. Chairman Powell’s statement this week will be the key.

GBP:

In contrast to the US data, inflation in the UK is still in double-digits, even though the UK was an early-adopter of raising rates to combat inflation. The rising labour cost index and food prices have offset the impact of falling energy prices in the United Kingdom, keeping inflation at high levels. Governor Andrew Bailey has already increased interest rates to 3.50% and the United Kingdom’s double-digit inflation is likely to call for a continuation of a higher interest rate hikes. According to a poll from Reuters, Investors are mostly betting on another half percentage-point increase to 4.0% and that Bank Rate will peak at 4.5% soon.

EUR:

Thursday is very likely to see another 0.5% rate hike from the ECB as the central bank seems set to ‘stay the course’. If the ECB hikes by 0.5% and the Fed only raises by 0.25% AND signals a slowdown in rate hikes, the EUR/USD could charge through 1.1000 easily. The ECB must take into account the easing of natural gas prices and manufacturing and services data which recently beat estimates with the EU services statistic re-entering ‘expansionary’ territory. Contrary to this, GDP data is due this week and the forecast suggests that we’ll see a quarter-on-quarter contraction and a possible EU recession in H2 2023. The continued strong rhetoric from the ECB has kept the ECB has kept the EUR at strong levels, particularly against GBP, with GBP/€ at 1.1400, down from 1.1800 6months ago.

AUD:

Boosted by an increase in global risk appetite and the re-opening of China (+4% vs USD already in 2023). The previous inflation reading was unexpectedly high suggesting that interest rate hikes will continue in Feb and March.