Currency markets remain volatile, with divergent UK, Eurozone, and US trends. Last week, GBPUSD weakness was not sustained, despite lower-than-expected UK CPI, which came in at 10.1%. This, however, adds weight to the belief that the Bank of England may be close to the peak of its rate-hiking cycle. On the other hand, UK average earnings were higher than expected. In the background, PM Sunak is potentially renegotiating the N.Ireland protocol, and should this news come to fruition, the market may still pay attention to it.
JP Morgan has predicted a GBPUSD forecast of 1.1500 for December 2023, with the market focusing on potentially ‘higher for longer’ US interest rates.
The ECB has shown hawkish tendencies recently, with comments from ECB’s Schnabel stating that a 0.5% rate hike in March is much needed under all scenarios. Bloomberg has reported a peak interest rate of 3.75% for the Eurozone, 1.25% higher than the current 2.5%. The European Union expects the economy to grow by 0.8% in 2023, thus avoiding a recession. With the ZEW economic sentiment due to be released this week, we will determine if this positive outlook is confirmed. The Eurozone final CPI on Thursday may make the hawks screech even more loudly.
The US dollar had a torrid time in Q4 2022, losing 11% of its value as inflation fell and China re-opened. However, the market had been pricing in a 0.25% rate cut by the Fed in Q3 2022. With inflation being higher than expected in January and FOMC members warning of higher rates, the US dollar index has gained 4% in February. The US economy is printing strong data, with 500k jobs added in January and retail sales jumping the highest in nearly two years. The US dollar recovery may continue, supported by a growing economy and the expectation of higher interest rates.
The currency markets remain uncertain, and many factors could shift the sentiment in the coming days and weeks. Investors and traders will need to stay alert and monitor the situation closely.