News & Analysis

Last week the US Federal Reserve made clear that markets were underpricing the maximum level that they could take interest rates to, at a time when the Bank of England and European Central Bank have begun to strike an altogether more cautious tone. As a result, markets have begun to move away from talk of a Fed ‘pivot’ towards a softer interest rate environment, and instead have moved focus to increasing monetary policy divergence between the major central banks, for the first time since the end of the COVID-19 pandemic. For the week ahead, Thursday’s release of US consumer inflation data will be key, with the month-on-month reading forecast to increase to 0.7%, albeit with the annualised reading expected to soften to 8.1%, from 8.2% previously. In the context of the Fed’s unexpectedly aggressive stance, any reading above those numbers will likely spark a fresh round of USD buying. For the UK, after a brief respite from the tumultuous Premiership of Liz Truss, the Bank of England’s gloomy outlook for the UK economy has put heavy selling pressure back on GBP. With very little headline economic data due out until Friday, sterling is likely to remain out of favour, at least for the first half of the week. The outlook is similar for the eurozone, with a mix of weak economic fundamentals combining with overt political discontent regarding the prospect of further monetary hiking, making the single currency similarly unattractive for investors. Instead, whilst profit taking from the sharp recent strength in USD may see some pullback, overall the greenback is likely to remain the markets preferred store of value for now.

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Authors: 
Simon Harvey, Head of FX Analysis
Jay Zhao-Murray, FX Market Analyst
María Marcos, FX Market Analyst

 

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