Weekly Currency Review & Outlook 16-Jan-2023: A comprehensive review of the currency markets and upcoming events

A review of last week

Over the past week the US dollar continued to weaken against the pound, euro, yen and others, scratching at its lowest since April, while the Japanese currency gained against pretty much everything.

GBP gained against the USD but fell against EUR, as the conviction about further hiking from the Bank of England started to very slightly soften.

EUR/GBP reached 0.889 for the first time since the Truss-Kwarteng drama, and before that it was the highest since early 2021.

The Bank of Japan’s meeting is key to the progress of the JPY and is could be the momentous event in the forex market this week – but more on that below.

Since the immediate strengthening of the JPY with the policy decision just before Christmas, the JPY has struggled to maintain the level. The USD/JPY drifted higher before Wednesday saw the tide turn in favour of the Japanese currency against not only the greenback, as a newspaper report revealed the central bank will review the side-effects of its decades of ultra-loose policy at this week’s meeting. The biggest JPY gain was against the Swiss franc (CHF) and over 2% against all other major pairs.

The euro and Aussie dollar were other notable winners over the past week.

EUR/USD rose to around a nine-month high at the start of last week, with increasing confidence that the US Federal Reserve will slow down their rate hikes to 25bps from the meeting at the start of next month.

The single currency has been supported by a mild winter, data that has not been as bad as feared and hawkish comments from ECB President Christine Lagarde, who in December said the market should expect the central bank to raise interest rates at a 50 basis-point pace “for a period of time”.

AUD has been in demand after data showed inflationary pressures are yet to ease in Australia, with an advance to the highest level in 30 years.

On the prospect of more interest rate hikes by the Reserve Bank of Australia, AUD/USD gained around 1% against US and Canadian dollars and CHF, with good progress against GBP and NZD too.

Week ahead

The JPY is already in focus ahead of the BoJ meeting on Wednesday, following a hike to the central bank’s yield curve control mechanism just before Christmas and plenty of reports and speculation since.

Last week, yields on 10yr Japanese government bonds moved above the YCC ceiling of 0.5%, fuelling more speculation over whether there could be another surprise policy change.

JPY/USD, having dropped from above 132 to below 128, is at is at its strongest since late May and if it breaches below 126 would reach nine-month lows. As a reminder, at the start of 2022 a dollar was changing hands for less than 115 yen.

A policy change is by no means nailed on, with analysts noting that the rise in Japanese inflation could quite fairly be attributed by policymakers to higher prices for imported goods.

Former BoJ deputy governor Yamaguchi, considered to be a candidate to take over when Kuroda steps down in April, stated that Japan is already seeing signs of “homemade” inflation and has argued in favour of a more flexible approach to policy, with small adjustments to the YCC.

JPY could suffer this week, however, if no change is made or strongly signalled – though many analysts are expecting policy tweaks may be planned for coming months.

Elsewhere, there will be some big data to move GBP, with jobs numbers on Tuesday and inflation on Wednesday, and a BoE meeting coming in two weeks’ time. On Friday there’s also Gfk consumer confidence and official retail sales.

Financial markets are currently anticipating 95bp of further BoE tightening by August this year, but moves in wages and inflation data could put interest rate expectations and GBP under pressure in coming months.

While headline UK CPI is forecast to remain in double digits for a few months, the BoE’s favoured measure of domestically-driven price pressures – ‘core services’ inflation – has edged higher in recent months and this number will be important on Wednesday, as signs of a peak would knock GBP.

For USD, some hefty data will be coming to inform the Fed ahead of its meeting on 1 February, including a data dump on Wednesday including retail sales, industrial production, producer prices and the Beige Book, with more on Thursday including building permits.

Retail sales and PPI are both predicted to be weaker.

Fed speakers could also move currency markets, with notable ones including New York Fed chief John Williams on Tuesday, followed by Atlanta’s Raphael Bostic and St Louis’s James Bullard on Thursday.

For other currencies, the AUD could be moved by consumer confidence early on Tuesday, while Aussie jobs numbers come on Thursday.

Canadian inflation and housing data comes on Tuesday.

For the euro, there’s German inflation on Tuesday, EU inflation on Wednesday with the ZEW sentiment index, while ECB president Lagarde speaks on Thursday, along with fellow executive board member Isabel Schnabel.

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