Overlay
Markets

Parky's quick take: 15 May 2023

What’s the latest with currencies and FX markets this week? Neil Parker, FX Market Strategist, shares his views.

Last week’s Bank of England decision and UK data shows there are few good choices for the central bank

This article might be called ‘Week Ahead’, but last week’s BoE (Bank of England) decision, press conference and updated projections, merit some comment here first. The decision was expected, with the Bank Rate rising to 4.5% from 4.25%. The vote was expected also, with the committee splitting 7-2 in favour of the move, with only Dhingra and Tenreyro voting for no change in interest rates. However, while the BoE gave a somewhat hawkish commentary during the press conference about the risks of persistent inflation, its forecasts continued a theme of recent Monetary Policy Reports in predicting a persistent undershoot of inflation versus target from 18 months onwards. The markets didn’t like what they heard with the GBP selling off against the USD and EUR, a move that persisted into Friday after weaker than expected monthly GDP (Gross Domestic Product) figures.

For this week, we’ve already seen a much weaker-than-expected March Euroland industrial production release, but an upgrade to the EU Commission’s forecasts for 2023 and 2024 in Euro-Zone growth and inflation. Later this week, the UK labour market data for March/April and the German May ZEW* survey are due for release. Then US April retail sales, industrial production and housing data, and the leading index are all due.

The figures from the UK, Euroland and US may all point to a slowing of economic momentum, but the markets might react more negatively to this news from Euroland than the other economies, as there is more priced in, in terms of additional interest rate hikes in Euroland than elsewhere.

*Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index

What does this mean for USD and major currency pairs?

While the USD might benefit from this temporarily, there are questions about whether the dollar can hold onto gains given the ongoing negotiations regarding the US debt ceiling as well as growing calls for a pause in US interest rate hikes, in my view. If negotiations take a turn for the worse, then the USD could give back some of its recent gains. 

For the major currencies such as GBPUSD, EURUSD and GBPEUR, the upside is now a more challenging environment, and over the next couple of weeks we may see further pull backs after the weeks/months of increases. That isn’t saying that these rallies are over, but just that the markets might need to pause or even fall back further, before taking another shot at breaking higher. Fundamentals won’t necessarily be helpful here, and the US regional banking issues continue to rumble on as well, which might muddy the waters further. 

Will there be no change in interest rates from the Mexico and Philippines central banks, and what will that mean for currencies?

There have been a few surprises in terms of central bank decisions lately, but last week wasn’t one of those times when the financial markets were shocked by any decisions. This week is shaping up to be similarly uninteresting, with neither the Mexican central bank (Banxico) or the Philippines central bank (Bangko Sentral Philippines) predicted to raise interest rates. 

The decision in Mexico is likely to be a close call with the Fed having hiked recently, but the peso is the strongest it has been against the US dollar since 2017 and looks as if it could strengthen further. That will help ease imported inflation pressures, in my view, so the central bank can afford to pause for the time being.

This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes. It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in The Netherlands, authorised and supervised by De Nederlandsche Bank, the European Central Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, The Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, The Netherlands. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright © NatWest Markets Plc. All rights reserved.

scroll to top