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.

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