Daily Forex Report 31-Oct-2022: Euro hit by inflation data as GBP stabilises against USD

Forex markets eagerly await Wednesday’s Fed meeting

The euro responded poorly as of higher-than-expected inflation data emerged from Germany, France and Italy last Friday.

Italy in particular surged, with the harmonised HICP rate rising 3.4 percentage points to 12.6% year on year.

EUR/USD dove sharply and continued to move south over the weekend, hitting US$0.994 come Monday morning.

EUR/GBP was similarly bearish, falling to seven-week lows of 85.8p, as Europe’s scary mix of high inflation and softer economic data started to bite.

EU-wide inflation data is due at 11am and is expected to show record highs of 10.4%; anything higher could cause added drag on the euro.

The GBP has stabilised somewhat against USD, even as the US Dollar Index (DXY) entered the week unexpectedly high at 110.94.

At US$1.158, the GBP/USD pair is around 2.5% higher week on week.

Cable’s relative stability can be seen on the one-hour chart – Source: capital.com

The US Federal Reserve’s interest rate decision on Wednesday will undoubtedly set the tone in the forex markets this week.

Given FOMC’s joint agreement in October that hiking rates is necessary to “prevent the far greater economic pain associated with entrenched high inflation, including the even tighter policy and more severe restraint on economic activity that would then be needed to restore price stability,” the hawks seem firmly in charge.

Anything softer could allow the pound to climb.

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