Weekly Forex Review & Outlook 19-Dec-2022: US dollar and euro, the big movers and shakers last week

Bank of Japan start looking at changing its policy on yield curve control as inflation crept up to eight year highs

UK GDP due on Thursday

A review of last week

The US dollar and euro were the big movers and shakers last week as the Federal Reserve and European Central Bank pledged to keep hiking interest rates into economically restrictive territory.

GBP jumped against USD on Tuesday after another round of softer US inflation data was released, with cable moving from below 1.23 to above 1.244 on the day, and climbed back up to that level following the Fed announcement the day later.

But while these movements saw USD breach six-month lows it has rebounded a tad.

One analyst summed up the possible reason as being that while the Fed were hawkish, the market doesn’t seem to believe they really will be.

Fed Chair Jay Powell tried to talk the market back from getting too optimistic, saying the Fed still has a “ways to go” to win the fight against inflation.

But Cable since fell back to 1.213 and EUR/USD spiked to its highest since early June, surging from 1.053 to reach 1.072 at one point on Thursday afternoon.

In fact the EUR gained ground against most G10 counterparts, with gains of over 1% against many and over 2% against AUD and ZAR.

The reason was that on top of its expected 50bps hike, the ECB said rates would “still have to rise significantly” on top of the 250bps worth of hikes we’ve already had, with much more hawkish inflation forecasts also released and plans to begin quantitative tightening from March.

President Lagarde’s statement in her press conference that “we should expect to raise interest rates at a 50 basis-point pace for a period of time” dampened any hopes that there might be another downshift to 25bps at the next meeting.

A bigger winner was the Hungarian forint (HUF) which recouped a chunk of ground against the EUR after the European Council approved Hungary's recovery plan last week and ahead of the National Bank of Hungary’s meeting this coming Tuesday.

AUD was one of the week’s losers, with 1% losses against CHF, USD, JPY, CAD and NZD.

Week ahead

This week's diary is relatively empty in the G10 space, apart from the Bank of Japan meeting early on Tuesday, when the People’s Bank of China also convenes.

The BoJ meeting comes with the JPY back above the previous intervention levels of just below 150.00, meaning policymakers are likely to be much more relaxed now than they were two months ago.

Rumours have emerged that the BoJ might start to look at changing its policy on yield curve control now that inflation has crept up to its highest level in eight years – one to keep an eye on.

Second or third tier currencies pairs could come to the fore for traders, with central bank meetings in Hungary (Tuesday), Czechia (Wednesday) and Indonesia (Thursday).

The National Bank of Hungary has a hawkish “whatever it takes” setup that is expected to continue, while the Czech counterpart meeting is expected to be a non-event and the consensus pencilling in a 25bps hike from Bank Indonesia.

In the macroeconomic calendar, there’s US housing data as well as consumer confidence readings on Wednesday.

US gross domestic product numbers are due on Thursday and on Friday there is also US personal consumption data and durable goods orders.

UK GDP is also due on Thursday but no surprises are expected from the final reading of third-quarter numbers, which are expected to confirm the economy contracted 0.2%.

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