Weekly Forex Report & Outlook 31-Oct-2022: Last week was the turn of the ECB (European Central Bank) and this week the US Federal Reserve and Bank of England step up to the crease.

The early part of last week saw the US dollar on the slide in anticipation of a possible pivot or slowing in the Fed’s rate hiking cycle.

Bank of Canada

An unequivocally dovish hike from the Bank of Canada last Wednesday – where officials said they were “trying to balance the risks of over- and under-tightening”, added fuel to the fire, and so did another soft UK housing market update and PMI numbers.

USD

Against the pound, the dollar is down 2.8% over the past seven days, with sizeable falls against the Kiwi and Aussie dollars, Polish zloty, Swedish krona and Norwegian krone.

The US dollar index (DXY) fell from 112 to 109.6 on Thursday morning but as we come around to this week is back over 111 again.

GBP

Sterling was the undoubted weekly winner again, recovering ground from the losses of the Liz Truss era, with seven-day gains of 2% or more against the USD, JPY, CHD, CAD, AUD and NZD as markets took reassurance from the confirmation of Rishi Sunak as the new Prime Minister.

EURO

Apart from the dollar the euro had a mixed week as the ECB made its second 0.75-percetage point rate hike in a row, with a 1.7% fall against GBP, 1.2% for EURPLN and 1.1% for EURSEK, but 1%-plus gains against RUB, ZAR, TRY and HKD.

European Central Bank

ECB governor Christine Lagarde said that more rate hikes are on the pipeline, that the pace and the size of the future actions will depend on data and – perhaps most tellingly for many market watchers – she also said that “substantial progress” has been made in normalising policy, which was taken to mean that future move will be less aggressive.

Bank of Japan

The Bank of Japan also met last week but made no public changes to policy, though a jump against USD back below 150 was due to a suspected but unconfirmed US$36bn intervention in currency markets.

The Week ahead

More public central bank action will drive markets in the coming week, with a Fed decision on Wednesday and the BoE’s on Thursday.

In September Fed chair Jerome Powell indicated that the Federal Open Markets Committee was “strongly committed” to driving inflation lower by continuing to raise interest rates, following a trio of 75-basis-point hikes in June, July and September.

This month there has been increasing market speculation that the Fed will hike by 75bps again but also signal a potential move to smaller rate raises in coming months.

A recent report in The Wall Street Journal suggested that some Fed officials are concerned about overtightening, with a big debate to be had at this week’s meeting.

Most economists expect the central bank to hike by 75 basis points next week and in December.

However, the inflation genie had been put back in the bottle, with Fed’s favoured measure of core inflation rising 0.5% month-on-month in September, the same as in August, leaving a year-on-year rate of 5.1%, up from 4.9% previously.

Potentially adding fuel the fire of market speculation before the FOMC decision will be the Chicago PMI survey on Monday, ISM manufacturing data and prices numbers on Tuesday and MBA mortgage applications data earlier on Wednesday.

On Friday sees the big non-farm payrolls report, which could lose some of its impact, coming so soon after the policy meeting.

In between, we will turn to Threadneedle Street, London, which has not been quiet since its last meeting in September, just a day before the doomed mini-Budget.

The weakness of the pound in recent weeks, along with the political turmoil associated with that Budget have had a significant upward impact on UK inflation, as well as on the housing market, adding to effects from the rate rises so far this year by the Bank’s monetary policy committee.

Markets are unsure of the size of this week’s rate hike from MPC: with various calls for half a percentage point, three-quarters or even a whole point.

New PM Sunak said last week the UK “faces a profound economic crisis” in his first speech and new chancellor Jeremy Hunt is expected to announce some major tightening measures in a fiscal statement on 17 November, so there is lots for the MPC to mull over.

Some see the increased fiscal tightening reducing the scope for the MPC to be more aggressive, leading to a 50bps hike; while some who focus on the strengthening domestic inflationary pressures and tightness in the labour market have suggested this calls for 100bps, taking the base rate up to 3.25%.

Alongside the decision, the MPC will also to deliver its latest economic forecasts for inflation and GDP.

Other notable data in the week includes BoE lending data this morning, the manufacturing PMI survey on Tuesday morning for most major economies and the services PMI on Thursday, with construction PMI and UK new car sales on Friday.

For the euro area, GDP and inflation is due later this morning (11am UK time).

How do you manage FX Risk/Exposure?

Understanding your FX risk and exposure is paramount to your bottom line. At Currency Solutions our decicated team of experts can help you manage and understand you exposure or risk.

What does FX Risk/Exposure mean?

There are three types of foreign exchange exposure companies face:

1. Economic exposure
2. Conversion exposure
3. Transaction exposure

In short, FX/forex (foreign Exchange) exposure means the risk that an individual or company takes when executing transactions in foreign currencies.

If a business is looking to make transactions globally or in multiple currencies, it's important that they first identify their exposure to risk in order to put a calculated risk management strategy in place.

FX Risk/Exposure Management - How does it work?

Volatile currency markets can have a huge impact on your profits.

Let say that you set a 2021 price for a product, bought in USD including a 5% profit margin, based on the exchange rate when the pound was strongest.

When the pound weakened, your profit margin would soon erode, and leave you with -2.5% profit - based on the same price, from stock bought at the dollar’s peak.

This fluctuation in price could force you to either absorb the loss or increase your prices, with the knock-on effect of untenable prices in your already competitive market.

We are a payment solutions provider with over 20 years’ experience and expertise in foreign exchange payments Our services inlcude but are not limited to:

• Hedging and FX Strategies
• Best rates for Spot trades
• vIBAN set up
• E-commerce solutions

We know that it can be time-consuming and challenging to keep up with the innumerable ongoing events that continuously affect the global market mood.

Click here for an instant quote or contact us for a free foreign exchange health check, guaranteed to save you money.