After a rough couple of weeks for the UK, the Pound finally found support when Rishi Sunak was named the third UK prime minister in two months as GBPUSD finished 2-3% higher on the week. This week the focus will be on the Bank of England’s interest rate rise, with market expectations set between 0.5% and 0.75%. It’s unclear which direction the bank will lean after GBP hits 1.16 against the dollar, so we expect a volatile session this Thursday.
In the US, traders are searching for evidence that the FED may begin to pivot. The central bank interest rates have reached negative territory, which is starting to slow the economy. Weaker-than-expected housing data points to worsening economic conditions, but inflation has yet to budge, so the FED is likely to stay on track. This Wednesday, a 0.75% rate hike is priced in, so is a further 0.5% in December. Traders will be more focused on the softening of policy as the FED closes in on its top interest rate target. Any clues from the FED minutes this week will have a more significant impact than the rates themselves.
Over in Europe, EUR/USD temporarily traded above parity last week as the ECB hiked interest rates by 0.75%. Despite a bumper interest rate increase, the EUR fell due to a change of language from the ECB, which left markets feeling the central bank was beginning to pivot dovish. President Lagarde then declared that the ECB is solely focused on defeating inflation in what would appear to dial back on her previous comments. The landscape for Europe has stayed the same, but next year, the single currency will have a chance to play catch if the FED pivots. Will investors buy EURs once the FED’s hawkish policy concludes, or will the global recession support the greenback as a safe-haven?