GBP had a solid week breaking the psychological level of 1.20 and is now trading between 1.21 to 1.23 against the Dollar. Momentum was mainly driven by an increase in risk appetite and the reopening of China, leading to a dollar sell-off. Inflation remains sticky for the UK, reaching 11% in October, the highest in nearly four decades. The BOE’s recent hawkish comments about tackling inflation also gave sterling a bullish momentum. Still, the bank’s current approach has had little effect on reigning it in, leaving many questioning whether a Central Bank-driven recession is the only way out.
Over in the US, we see the polar opposite, with inflation beginning to fall and the economy continuing to grow. US GDP increased from 2.6% to 2.9%, whilst Non-Farm Payroll data showed the US labour market was still growing, adding 263k new jobs in November. However, the Dollar weakened when Fed Chair Powell confirmed that they would begin moderating the pace of rate hikes as soon as December. There is now an 80% chance of a more moderate 0.5% hike this December. Dollar strength should continue to weaken, but the FED still has a lot of work to bring inflation down from 7.7% to its target of 2%. With a strong economy, the FED still has room to hike aggressively, a luxury the UK and EU do not possess.
In Europe, the single currency also had a good week gaining close to 1.4% against the Dollar, and parity now seems like a distant memory. Again much of the bullish momentum was driven by Dollar weakness and the prospect of China reducing its covid restrictions rather than significant data or news from Europe. EU inflation fell from 10.6% to 10.0% in November 2022, whilst ECB President Lagarde continued her commitment to reducing inflation. As the war in Ukraine begins to slow over the bitterly cold winter months, Putin has signalled his readiness to negotiate. A ceasefire would be the most bullish driver for EUR buyers.
Events for the week ahead:
Mon Dec 5
01:45 EUR ECB President Lagarde speaks
09:30 GBP Final Services PMI
10:00 EUR Retail sales
15:00 USD ISM Services PMI
Tue Dec 6
03:30 AUD Cash rate Decision/RBA Statement
Wed Dec 7
00:30 AUD GDP QoQ
10:00 EUR Revised GDP QoQ
15:00 CAD Bank of Canada Interest Rate Decision
Thu Dec 8
00:30 AUD RBA Bulletin
12:00 EUR ECB President Lagarde Speaks
Fri Dec 9
09:30 GBP Consumer Inflation Expectations
13:30 USD PPI
15:00 USD Preliminary UoM Consumer Sentiment