GBP lost ground late on Friday ahead of the Bank of England meeting this week with markets pricing in the near-end game of the Bank's rate hike cycle as well as seeing a sell-off in equities in a sign of lower risk appetite. The EUR drew some demand following the sell-off after the ECB meeting on Thursday and USD was marginally lower on the day as well.
* Daily move - against G10 rates at 7:30am, 18.09.23
** Indicative rates - interbank rates at 7:30am, 18.09.23
Market data will be thin until we get to Wednesday when we have UK inflation numbers and the Fed meeting. Thursday sees the Bank of England meeting and then on Friday we have PMI activity numbers from the UK, US and EU as well as UK retail sales.
So what are we looking out for? UK inflation is expected to rise due to higher energy prices but core inflation is expected to ease to 6.8%. No rate hike is expected by the Fed so the focus point will be the revised Fed dot plot and guidance on the economy – hints of a hike in November will likely be USD supportive. With the Bank of England, there are two scenarios. Either, a final hike of 0.25%, or a pause with suggestions of a hike in November. Ultimately though, the market's perception will be that the BoE are at the end of hiking rates and we could well see markets increase their bets on rate cuts in 2024 – which will be GBP negative.
We said last week that FX markets will likely focus on growth differentials going forward so Friday's PMI numbers for September will be a key gauge for this and between the UK, EU and US, current expectations see US activity higher.
Ultimately the week sets itself up for continued gains for USD, unless we see a dovish interpretation of the Fed meeting, as markets continue to favour the currency on growth differentials. According to data from the Commodity Futures Trade Commission, hedge funds turned bullish (positive) on the currency for the first time since March.
After the shocks caused by the mini-budget this time last year, GBP had a very strong performance across the last 12 months. However, the good times look to be ending with the end of the BoE rate hike cycle in sight and markets focusing on the growth prospects of the UK economy. On a technical basis the year long broke in July and since then we have seen a key support level for GBP taken out, reaffirming the prospect for more weakness on GBP. We will need to see an overtly hawkish BoE meeting on Thursday to draw demand for the currency.
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