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FX outlook Parky's quick take 31 January 2023

What’s happening with currencies this week? Neil Parker, our FX Market Strategist, shares his views.

Yet more weakness from UK consumer sector; Italian and French consumer confidence records surprise drop

Last week saw additional weakness in the UK consumer sector, this time from the CBI (Confederation of British Industry) distributive trades survey for January. A further deterioration in the reported sales balance, which dropped from -5 to -22, suggested that retailers had experienced no rebound in activity during the January sales, and that the squeeze on household incomes remains the key factor for consumer spending. January consumer confidence figures from Italy and France also dropped unexpectedly, suggesting that the pressures on consumers are not limited to the UK, but far more widespread across the West.

What will the major central banks deliver this week?

This week sees the central banks of the United States, United Kingdom and Euro Area decide on monetary policy. Current expectations are that the Federal Reserve will hike by 25 basis points (to 4.75%), whilst the Bank of England and European Central Bank will both hike by 50 basis points (to 4% and 3% respectively). There should also be some updates on how the central banks view the progress on tackling the inflation overshoot, as well as the performance of the domestic economies of the US, UK and Euroland.

Aside from the decisions and updates from the central banks, the FX market focus will likely be on the January US non-farm payrolls release on Friday. The strength of labour demand around most Western developed economies has been the main reason for interest rate hikes from the central banks, that fear the supply chain and energy-led headline consumer price inflation will feed into second-round effects via elevated wage inflation. The non-farm payrolls figures are expected to record a slowing in the pace of employment growth, and there could also be a rise in the unemployment rate and a drop in average earnings growth. Could this be a turning point for global labour markets? Signs of increased layoffs across economies and sectors suggests a loosening of tight labour conditions.

FX markets wait nervously on the central banks

Most of the major currencies were constrained in tight ranges over the course of last week. GBPUSD managed to move in a range of less than 2 cents, with a high of $1.2448 and a low of $1.2264. GBPEUR traded in a smaller range than that, between €1.1423 and €1.1297, and EURUSD traded in a range of less than a cent, between $1.0929 and $1.0835. The FX markets had little important data to feed off, and appeared to be nervous of what could be coming from the central banks this week.

Could the central bank decisions unlock more upside potential for GBPUSD and EURUSD, or will these meetings signal an end to the USD sell-off that has lasted for the best part of the last four months?

South African Reserve Bank slows the pace of tightening unexpectedly; will other central banks follow suit?

A cut to economic growth forecasts and risks of further power shortages did not deter the South African Reserve Bank from raising interest rates again, albeit the hike was only 25 basis points, versus 50 basis points expected by the markets. Could this be a sign of things to come as economic outlooks worsen for economies around the globe? Perhaps, with the central bank of Colombia hiking only 75 basis points at the end of last week, when a full percentage point hike had been anticipated.

For most emerging market central banks, the risks of additional tightening from the Federal Reserve appear to be decreasing, and so the need for them to hike is doing the same, in my view.  

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