Weekly Forex Review & Outlook 07-Nov-2022: After a week of turmoil, USD faces uncertainty due mid-term elections, UK to focus on GDP & Eurozone feeling the inflationary pressures

A review of last week

Last week was a hectic one for currency markets as further central banks put hopes of an end to central bank hiking firmly to bed, with the Bank of England delivering the gloomiest outlook of all.

The pound was undoubtedly one of the big losers of the week, falling over 2% against the dollar and euro, and even more against the New Zealand, Australian and Canadian dollars.

This was despite a record interest rate rise of 0.75 percentage points from the BoE, which then proceeded to press home the message was that rates were unlikely to go anywhere near as high as markets were pricing, with the UK economy expected to face a two-year recession.

GBP/USD tumbled back from just shy of 1.1500 to below 1.1200 in less than 24 hours.

This was a day after the Federal Reserve raised rates and chair Jerome Powell gave a hawkish press conference, indicating that the peak interest rate is higher than the market expects, which led to the dollar following day as markets mulled over the consequences.

However, Powell stressed during the post-decision press conference that it is “very premature” to think about a pause in the tightening cycle, noted that the time to slow the pace of hikes could come as soon as the next policy meeting but said the Fed “have a ways to go” in raising rates.

Two days later, a USD squeeze on Friday was perhaps triggered by optimism on China's Covid rules, but today the dollar index is down to a week’s low after the Chinese government reiterated that it would stick “unswervingly” to the ‘zero-tolerance Covid’ strategy.

The Week Ahead

But there are more key risk events for the dollar this week, US consumer price inflation and mid-term elections, where control of Congress as well as key state and local offices are up for grabs.

For midterms on Tuesday, current polling indicates the Republicans will retake control of the House of Representatives but the Senate is a more difficult one to call.

Whoever wins, history shows that financial markets tend to rally after these elections, though mainly equity markets.

In terms of Thursday’s US CPI, the monthly headline rate for October is forecast to rise 0.6% after a 0.4% for September, with the yearly rate dipping to 8% from 8.2%.

Core CPI is seen rising 0.5% on the month, to edge the yearly rate down to 6.5% from 6.6%.

As the Fed has continued to stress its decision making is data-dependent, inflation is a key determinant of whether there will be a downshift in December and how high the terminal rate ends up.

There will also be trade indicators from around the globe, including Europe, China and Japan, with the dollar surge and volatile energy prices in focus.

The UK will be in focus with GDP numbers due on Friday, along with trade, industrial production and construction figures.

All in all they are expected to show the UK economy fell into reverse in the third quarter, with economists forecasting a 0.1% decline in the quarter.

The figures are likely to confirm the UK economy is heading into the recession with the BoE forecasting GDP will fall by 0.75% in the second half of 2022.

Tuesday also has UK retail sales and Thursday house prices from RICS.

Eurozone retail sales are on Tuesday, along with the EcoFin meeting, while German inflation numbers are on Friday.

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