Monfor Weekly Update

GBP/EUR suffered last week on the back of the possibility of a widening differential in interest rates between the Bank of England (BoE) and the European Central Bank (ECB). This could lead to Sterling being priced well below 1.12 this week, potentially even below 1.11. Sterling started the week at low levels after declining for the previous five days, with the largest losses seen following policy announcements from the BoE and ECB.

BoE Governor Andrew Bailey stated in a press conference that while they have seen improvement, there are still significant risks to the economy. If these risks materialize and there are further overshoots in wage and service inflation data, the BoE will need to respond with further rate hikes.

With this in mind, the BoE raised the Bank Rate to 4% last week but did not commit to further increases in the future, recognizing the risk of higher borrowing costs. The ECB, on the other hand, confirmed that interest rates will rise further in March and in the months following.

The conflicting policy outlooks are putting pressure on GBP/EUR, which may remain suppressed this week with members of the BoE Monetary Policy Committee speaking ahead of Friday's GDP data. If the GDP data comes in weaker than expected and confirms a UK recession, this could lead to a revision of expectations for Bank Rate. The possibility of a recession is still uncertain as economists predict 0% growth in the last quarter due to an expected -0.3% reading for December GDP.

Monfor Weekly Update

UK data this week shows a weakening economy, with worsening consumer and business sentiment due to rising taxes, high prices, and recession risk. Record gov't borrowing exacerbates the challenges ahead.

The Bank of England is still expected to raise interest rates by 0.5% to 4.0% next week, but another split vote is likely. The rate peak forecast has dropped to 4.35%, with a potential rate cut priced in for late 2023. The central bank must balance high inflation, a tight job market, and a weakening economy.

The US central bank is expected to raise rates next week, but with a smaller hike of 0.25%. The market predicts a peak rate of 4.90% in Q2 2023 as inflation continues to drop.

ECB officials remain hawkish and are expected to keep raising rates in 0.50% increments to curb inflation.

Next week will likely see extreme volatility across assets due to central bank meetings, followed by the crucial US jobs data on Friday.

Dollar weakness is the main theme on the expected Fed slowdown and positive risk environment. GBP/USD is near 7-month highs but capped at 1.2500, while GBP/EUR stays in the range of 1.1250-1.1550.

 

 

 

 

Monfor Weekly Update

UK data this week has been relatively encouraging, with inflation dropping slightly to 10.5%, raising hopes that we are past the peak. Robust jobs market numbers, with unemployment remaining at 3.7%, although average earnings, despite pushing up to a stronger than expected 6.4%, further highlight the squeeze on disposable income.

The UK housing market continues to cool, as the cost of living and higher interest rates further weigh on demand.

This increases pressure on the Bank of England ahead of their meeting on February 2nd, with most analysts now expecting a further 0.50% rate increase with inflation still far too high, despite the growing recessionary risks.

China growth data has been stronger than expected as they further reopen the economy, which is adding to a general risk-on environment. Relations with the US also appear to be moving in a more positive direction.

The US central bank may slow its tightening policy to 0.25% incremental hikes from next month as inflation cools, whilst the ECB look set for another 0.50% increase.

On the exchanges, dollar weakness continues to drive sentiment on the generally more positive risk environment. GBP/USD remains near its 7-month highs but continues to be capped at the significant 1.2500 barrier, whilst GBP/EUR remains within the well-established range of 1.1250-1.1550.

Monfor Weekly Update

The start of the new year has brought a more optimistic outlook, as economic data improves, China reopens, inflation appears to be peaking, and central banks are expected to end their rate hike cycle. The focus is shifting away from concerns of a recession.

Starting state-side, US Inflation dropped to 6.5%, potentially indicating that the Federal Reserve may slow their tightening efforts in the coming months. Following the release of the inflation figures, US equity markets heavily rebounded and markedly impacting the value of the dollar.

Closer to home, growth figures in the UK were slightly better than expected, with crucial inflation and employment numbers set to be released next week, which could influence the size of the rate increase expected by the Bank of England on February 2nd. The market is divided on whether this increase will be 0.50% or a more moderate 0.25%. The projected peak for rates has dropped to around 4.40% in June, though a recent split in voting suggests the next meetings will be noteworthy.

The Eurozone economy continues to show signs of recovery, driven by lower gas prices and milder weather, though another 0.50% rate hike is likely next month as policymakers remain cautious about persistent high inflation.

GBP/USD has seen some ongoing demand below the psychological level of 1.2000 but is capped at the significant 1.2500 barrier. GBP/EUR is under pressure at its 3-month lows as the EUR strengthens across the board due to the improving economic outlook.

Please note:  The news and information contained on this site should not be interpreted as advice or as a solicitation to offer to convert any currency or as a recommendation to trade.

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