Weekly Currency Review & Outlook 23-Jan-2023: A comprehensive review of the currency markets and upcoming events

A review of last week

The past week saw the pound steadily rising against the US dollar, while the euro moved sideways against the greenback last week but is on the front foot today.

Last week saw the European Central Bank push back against reports that suggested smaller rate hikes were being considered.

In the early hours, EUR/USD breached 1.09, its highest levels since last April as comments over the weekend from one ECB member suggested 50-basis-point hikes were likely for at least the next two meetings.

Sterling, meanwhile, climbed from 1.22 at the start of last week up to the brink of 1.245, levels seen in mid December. And it could soon cover ground not seen since last June if it continues its run, having closed higher against USD for the fourth week in succession.

The Japanese yen was in focus again as we had a Bank of Japan meeting.

JPY fell sharply against many major currencies after the Bank of Japan meeting on Wednesday as monetary policy was left unchanged, which was not a huge surprise to economists but saw sizeable spikes in the currency as the market was expecting something more.

As well as keeping their inflation forecast unchanged and trimming growth estimates, BoJ policymakers announced they would continue large scale bond buying and be more flexible about duration in order to keep policy settings loose.

Analysts said more volatility in JPY is expected as the market tries to break the bank’s strategy that is seen as unsustainable.

It was a strange week for JPY/USD, almost was a week of consolidation after reaching 128, but interspersed with some leaps back up to 129 and 130.

The New Zealand dollar saw some action on Thursday after prime minister Jacinda Ardern resigned.

GBP/NZD, AUD/NZD, EUR/NZD and USD/NZD all fell over the week.

Looking at AUD/USD, profit-taking this week removed it from top place of G10 currencies in the year to date.

Other big movers included the South African rand, which lost more ground to EUR and GBP, and also reversed previous gains against USD.

WEEK AHEAD

Ahead of policy decisions to come the following week from the Fed, ECB and Bank of England there is more data this week, of course.

There is also a rate decision by the Bank of Canada this Wednesday, with an expected rate increase of 25 basis points from the current 4.25% to 4.5%.

Many think this will be the eighth and final hike of the current cycle, but indications around that will affect the currency – with the BoC likely to say it is taking a pause.

Tuesday has potential spurs for many forex pairs on the back of flash PMI figures for the UK, US, EU and Japan.

EU data was a rare bright spot last month, though the last surveys still indicated economies are still weakening, with the US downturn notable.

UK public sector borrowing and CBI business confidence on the same day could combine to create some volatility in GBP.

For USD, Thursday may be key, with the Fed's favoured measure of inflation, the core personal consumer expenditure deflator, in focus.

An easing trend in price pressures may be confirmed, as US data has continued to soften over recent weeks. The US GDP for the fourth quarter is also expected on the same day.

There will be no scheduled Federal Reserve speakers as this is the blackout period ahead of the upcoming policy meeting.

For the JPY, there will be the latest core CPI inflation print on Thursday night /Friday morning, having leapt to 4.0% from 3.6% in the prior month.

A further nudge higher would be expected to only encourage the market to push harder against the BoJ.

Elsewhere, Australian and New Zealand inflation updates are due early on Wednesday.

A surprise drop in Australia’s employment in December has encouraged thinking that the central bank may be close to their own pause, according to some forex analysts.

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