Weekly Currency Review & Outlook 30-Jan-2023: A comprehensive review of the currency markets and upcoming events

A review of last week

Australian and Canadian dollars have been in demand in the past week, pushing the US dollar, euro and pound to the sidelines.

However, meetings for Federal Reserve, European Central Bank and Bank of England this week will mean their time will come in the next few days.

Looking back first, the Aussie regained its place as the most popular long currency trade in 2023 so far.

Markets expect the country’s central bank to keep on hiking interest rates for now, after manufacturing data slipped into contraction territory for the first time in 32 months and then a day later Aussie inflation rose much higher than expected.

Over the past seven days, the AUD gained over 2% against the yen and the Swiss franc, with increases versus the US, Kiwi and Canadian dollars not far behind.

The Bank of Canada gave a helping hand to the Loonie as it raised interest rates by another 25 basis points on Wednesday, while announcing the continuation of its quantitative tightening programme.

However, the BoC’s said if economic developments go as expected, it expects to hold rates at their current level in “while it assesses the impact”.

CAD added around 0.3% versus USD, making most progress versus SEK, NOK and ZAR.

Looking as USD indicated the blackout week ahead of the Fed decision did its work, with traders keeping their powder dry ahead of the meeting, with the dollar index pretty much flat, with losses against AUD and JPY balanced by gains against the Nordic currencies.

As for sterling it was almost exactly the same picture, while Cable ended just a few pip down from the 1.240 it started last week and EUR/GBP likewise.

WEEK AHEAD

Interest rate hikes are nailed on for the Fed, ECB and BoE this week but there’s a lot more to it that will affect the forex markets, as well as the new month’s data in the second half of the week.

The Fed steps up to the plate first, on Wednesday, starting February with what is predicted to be a further reduction in the size of its rate rises, to 25 bps from 50 bps in December, taking its target rate range to 4.50-4.75%.

Recent fading of inflation numbers and strong signals from Federal Open Market Committee members have encouraged this view among forex and bond markets.

But there is less of a consensus on what else the FOMC will say alongside this rate move, with some feeling Jerome Powell and co will hint at the high chance of another hike ahead, while others anticipate the pause button could be pressed, like their Canadian counterparts.

The latter would be expected to send USD back onto its recent downhill path.

On Thursday, the BoE’s monetary policy committee steps out to bat at midday, with a press conference half an hour later and then the ECB decision three quarters of an hour after.

Having hiked more slowly, from 0.25% to 3.50% last year, this time the MPC will go further than their US counterparts, with a second consecutive 50bps hike expected to 4.0%.

As with the December meeting, there is expected to be a split of opinions between committee members due to mixed signals on the inflation outlook.

Data since the last meeting indicated the year finished more strongly than expected, with the jobs market cooling but still tight, headline inflation softer but core inflation remaining sticky.

This is expected to be followed by one or two 25bps hikes to a peak no higher than 4.5%, though with inflation seen as likely to drop more rapidly from March, bond markets are already pricing in cuts towards the end of the year or early in 2024.

For GBP, analysts expect not much help from the MPC in the short term, given the recent tendency to talk the currency down, with the possibility that new forecasts could tweak the growth outlook and Andrew Bailey’s guidance on future decisions is also projected to include some dampen expectations of policy easing.

Over to the ECB, where governing council members have been batting away suggestions that a 25bps hike will be made due to some encouraging recent data, which has had the effect of jiggling the euro around in the past couple of weeks.

Last year the main refinancing rate was hiked from zero to 2.50%, with Christine Lagarde et al stating that tightening measures will begin this March, no longer reinvesting cash from holdings that mature.

Markets now accept a 0.50% rate rise is likely at this meeting, to be followed by a few more hikes as long as core inflation forecasts remain above 2% but the exact path remains unclear.

Commentary around future policy will be key for the single currency.

As for macro data, the big event is the US non-farm payrolls report on Friday, with Wednesday’s ISM manufacturing index lost in the Fed commotion.

EU inflation and jobs data will be released on Wednesday morning, a day ahead of the ECB meeting.

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