Daily Forex Market Report 20-Jan-2023: Sterling seen lower against US Dollar, EURO tests 9 month highs

Cable was seen 0.3% lower this morning after drawing back from the seven-month highs tested in recent days. The pair was changing hands at 1.235 at the close of the Asia trading session.

The greenback’s relative weakness in 2023 precedes an expected soft touch to interest rates come the first Federal Reserve meeting on February 1st, even though the hawks still command a presence at the bank.

As Fed vice chair Lael Brainard said on Thursday: “Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2%.”

Regardless, the market seems convinced that a 50 bps rate hike will not materialise at the February 1st meeting, instead pricing in the likelihood of a softer 25 bps hike.

So it makes sense to see the US Dollar Index (DXY) continue to test eight-month lows, with a current price of 101.66 after closing 0.3% lower on Thursday.

Can GBP/USD surpass July highs? – Source: capital.com

European Central Bank president Christine Lagarde all but confirmed a 50 bps rate hike at the next meeting scheduled for February 2nd.

In December minutes released yesterday, Lagarde said: “The monetary policy stance had to be tightened decisively and that the current configuration of interest rates and expectations embodied in market pricing was not sufficiently restrictive to bring inflation back to target in a timely manner”.

The markets could continue to boost the euro to the upside as a response to the ECB’s hawkishness but in the meantime, EUR/USD is facing resistance at April 2022 highs, having ranged between 1.076 and 1.088 over the past week.

EUR/GBP, having posted three straight days of clear losses, added 0.3% 87.69p this morning following the sharpest December decline in retail sales since records began in 1997.

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