Weekly Forex Review & Outlook 09-Jan-2023: A comprehensive look at the currency markets

A review of last week

Last Thursday the US dollar rose to a month’s high before jobs data sent it back close to recent six-month lows.

GBP/USD, having reached a six-month high in mid-December, characterised this shift by falling to around a six-week low close to 1.185 in the early hours of Friday morning before sprinting up to 1.2096 on Friday and continuing to rally early this week.

Not too dissimilarly, EUR/USD, also trading close to six-month highs since the fortnight before Christmas, on Thursday fell to a month’s low of 1.048 before also darting up to 1.0646 on Friday and today coming within a whisker of 1.07 but facing more resistance.

EUR/GBP, which since September’s politically sparked drama, has not meaningfully stepped outside a channel between 0.88 and 0.86, spiked up to 0.886 midway through Friday before tumbling back to the low 0.88s.

Today it has continued lower and lately was pushing down through 0.877.

The big data points last week were unsurprising US Federal Reserve minutes, weak European headline inflation, a bad miss for the US ISM services data and a mixed non-farm payrolls report that contained a surprise fall in the unemployment rate.

As well as the USD decline, it was also the best week for 10yr German bunds since the early 1990s.

Japan’s yen has also been in focus in recent weeks, with Tokyo having wrestled USD/JPY back from 150 in October to just below 130 at the start of this new year.

Last week saw JPY retreat, with a move back to 134.5 during Friday’s early session, before sliding back to 132 later in the day and reaching 131.5 on Sunday and rallying slightly today.

Other winners in the past week have included the Aussie dollar and is Kiwi neighbour, with pairs such as AUD/JPY, AUD/USD, NZD/JPY and NZD/USD adding over 0.7%.

JPY also declined against the Swiss franc, pound sterling and Canadian dollar. EUR put on gains against the Turkish lira and Hong Kong dollar.

Week ahead

US inflation on Thursday will be the week’s big data point for the USD and perhaps a pivotal point for the whole forex market for January.

Friday’s University of Michigan survey is also inflation-related, containing a gauge of consumer inflation expectations.

If rates of inflation do slow, the market’s view is that the Fed will pause on rate rises and then pivot to rate cuts, sending the dollar lower and benefiting bond and share prices.

The headline US consumer price index is expected to moderate but remain well above the Fed’s 2% target, with economists forecasting much sharper falls in the annual rate of inflation from the second quarter onwards.

For the euro, key data will include industrial production and trade data in Germany, France and the Eurozone.

There will also be labour market data today, with economists and forex traders wondering how much longer unemployment rates can decrease and if this could unleash more hawkishness from Christine Lagarde and her European Central Bank colleagues.

Trade data will be important for EURUSD after encouraging improvements in the trade balance and questions being asked whether softening natural gas prices will have caused further improvements.

For GBP, the main event may be Friday’s monthly GDP report for November, with retail sales data on Tuesday the only other data of note.

The UK economy is weakening and many in the market are expecting a negative monthly figure.

For other currencies, Australian inflation is on Wednesday and balance of trade numbers on Thursday, same day as Chinese inflation, with Beijing reporting trade data on Friday.

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