RedFX Update: GBP remains strong, USD uneasy into next week
Key ideas: The previous 10 days has seen a pullback in USD strength, GBP remaining strong, Chinese data revealing lots of areas of weakness, and the Canadian dollar weakening further..
- Next week – 13th / 14th December - is the US Fed’s final interest rate decision of the year, and the market is split between a 50bp or 75bp hike.
- Next week – 13th / 14th December - is the US Fed’s final interest rate decision of the year, and the market is split between a 50bp or 75bp hike.
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GBP:One word - Resilient. Benefitting from a weaker USD and an unsure EURO, sterling has held onto its gains made when UK politics found a firmer footing and its finances were dragged from the depths by the new leadership. However, many commentators are observing the number of key Conservative MPs that are leaving the party and interpreting this as jumping ship before an election that appears likely to herald a return to government for Labour.
As more UK data disappoints (weaker housing market, stalling labour market momentum), the Bank of England meets next Thursday. The UK central bank is expected to hike rates by 50 bps, though some analysts anticipate a larger 75 bps move – although this will be met with the public’s ire as they face a cost-of-living crisis and public sector strikes to disrupt the entire month of December. Nonetheless, we can expect this and the Fed’s decision to give medium-term direction to GBP/USD
GBP/EUR at 1.1570 GBP/USD at 1.220
EURO: President Lagarde’s speech is awaited today, with EUR/USD trading near 1.0500. We can expect some hawkishness from Lagarde today - the ECB rhetoric is that a lot has already been done to battle inflation and another rate hike should be expected in December .However, with annual inflation expectations climbing from 5.1% to 5.4% recently, the market will be reluctant to rule out further hikes – which should keep some upward impetus behind the EURO.
The Eurozone is battling inflation in the face of some pretty serious weaker data – monthly and annual Retail Sales this week showed an above expectations slowdown in consumer spending due to inflationary pressures. Let us also not forget the very real upcoming state-wide power-outages that are due to happen in Germany and are being touted as ‘expected’ in France.
USD: Will the Fed hike by 0.75% next week, boost the USD, and tell the world that rates won’t decline as soon as the market thinks? Or will they increase by just 0.5% and indicate a slowdown in the pace of rate hikes?
The case for 0.5% is strong, with last week’s data confirming a strong labour market and the Institute for Supply Management (ISM) said its Non-Manufacturing PMI rose to 56.5 last month from 54.4 in October, indicating that the services sector, which accounts for more than two-thirds of US economic activity, remained resilient. After this data, some economists suggested the US will not fall into recession in 2023.
0.75% is being priced as less likely, but for some, it is an opportunity for the Fed to have one last swing of the bat to combat inflation. If they are then proven to have gone ‘too far on the upside’ with rate hikes, then the Fed can easily cut rates at a fast pace. Let us not forget that they have done this before!
US Stocks will struggle to rally hard until the Fed’s decision is clear, and we have US jobless Claims and Consumer Confidence data before the release.
EUR/USD 1.0500 GBP/USD 1.2200 USD/JPY 136.50
AUD: Usually rocked by bad news from China, the Aussie dollar has held strong in recent days as the Central Bank today released a mixed economic view in the quarterly Bulletin from the Reserve Bank of Australia. The currency can expect to be boosted by domestic factors such as GDP data which is now 6.5% above pre-pandemic levels – stronger than most major economies. However, the currency remains intrinsically linked to events and the outlook in China.
CAD: Still battling inflation, The Bank of Canada rose 50bps, the sixth consecutive increase, and took the target rate to 4.25%, but the left door open to a slowdown in early 2023, which weakened the currency. Although the market favoured only a 0.25% increase, it was the first time the wording has changed since they started hiking, and there is now a medium term pressure on the Canadian dollar as the market re-prices the slowdown in rate hikes.
EUR/CAD at 1.4350 now, which was at 1.3400 just 1 month ago, shows the extent of CAD weakening
Next week’s data will give medium-term direction and momentum to currency markets as we enter the illiquid and sometimes jumpy Christmas period. If you have any questions regarding payments or currency, please call or email