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GBP
Following last week’s latest interest rate meeting, and a decision by the MPC to raise Bank Rate by 25bp to a new high of 4.50%, markets have continued to look for more guidance from the Bank on the path forward. In our view, the BoE is likely finished with its hiking cycle given that the Bank has maintained a data dependent stance, but upgraded its projections in the latest Monetary policy Report, significantly raising the bar for hawkish data surprises. Comments by BoE Chief Economist Huw Pill last Friday appeared to play into this narrative, where he indicated that UK inflation is now at a “ turning point” and should begin to slow rapidly. Markets and analysts will get a further opportunity later today to see if he chooses to double down on this stance, with Pill taking comments at 17:00BST on the contents of the MPR in a live Q&A. Despite what we see as a relatively dovish stance from the BoE, and the Bank having achieved a sufficient level of monetary tightness to bring inflation back to target according to the BoE’s own forecasts, markets continue to price around one and a half further hikes in Bank Rate by the MPC – pricing that has remained relatively unmoved by previous commentary. It may well be that markets need to see weakening in the hard data before being convinced to pare rate hike expectations. Therefore, notwithstanding Pill’s comments later today, the week’s main event as far as sterling is concerned is likely to come in the form of labour market data published tomorrow morning. Whilst the release is expected to be something of a mixed bag, printing broadly in line with previous readings, signs of weakness could lead to a further sell off in the pound which is now down over 1% from its recent pre-MPC peak.
EUR
The single currency broke out of its recent range against the dollar to the downside last week as less rate cuts were priced into US money markets and debt ceiling concerns prompted a flight into the dollar. This depreciation occurred despite consistently hawkish commentary from ECB members, which largely fell on deaf ears as traders await data to validate their calls. This week, with very little scheduled in the eurozone data calendar and ECB commentary having little impact on eurozone rates and thus spot FX markets, the emphasis is likely to remain on US developments. As mentioned above, this largely puts the emphasis on debt ceiling discussions.
USD
The broad dollar DXY index surged 1.4% over the course of the past week. Aided by haven flows on renewed concerns over the US banking system and potential government default, alongside an uptick in medium-term inflation expectations on Friday which lifted Treasury yields, the dollar notched its best weekly return since late September. This morning in the absence of more dramatic news on US regional banks over the weekend, however, the dollar begins the week trading on the back foot. While profit taking is likely at play across the G10 complex, especially given the sentiment from the White House over debt ceiling discussions remains positive, the Aussie and Kiwi dollars are receiving their own tailwinds from China. Not only have Chinese inventories of iron ore slipped for an eleventh consecutive week suggesting mills are boosting production, but the PBoC continued to inject more liquidity into the economy than analysts had expected.
Over the course of the week, discussions on the US debt ceiling are likely to play a prominent role in broad USD price action. Data on the Treasury’s finances suggests it has just $88bn of leeway left to meet its spending commitments, a $22bn drawdown from the week prior. At this pace, that leaves just four weeks without any extraordinary measures being implemented before the US government defaults on its obligations, meaning the clock is ticking for Congressional leaders to break the impasse. Talks are set to take place between President Biden, House Speaker Kevin McCarthy and other Congressional leaders tomorrow before Biden heads off to the G-7 summit. Should any progress be announced, we expect the dollar to weaken at the margin, especially against risk sensitive currencies. In the absence of this, the dollar is likely to remain supported on haven flows and rising Treasury bill yields. In terms of today’s economic calendar, the emphasis will be on the Fed’s implied interest rate path given a swathe of speakers are scheduled from 12:30 BST.
CAD
After a relatively quiet start to last week, USDCAD really kicked into gear on Thursday and Friday. This pickup in price action was driven by a return of risk-off sentiment that boosted the dollar, led by concerns over an impending risk that the US government crashes into the debt ceiling, and worries once again around the stability of the US banking sector. Compounding this, a selloff in oil also weighed on the loonie with USDCAD ultimately rallying close to 1.4% by weekend, a move that returned the pair close to its one month highs. Early trading today has begun to see the pair give back some of last week’s gains, with the dollar down around three tenths against the loonie. But, with the debt ceiling and financial stability risks likely to once again be in focus for markets, the coming week looks set up for yet another bumpy ride for the pair.
FX Elsewhere
Elections in Turkey provided the big news over the weekend as President Erdogan faces his toughest challenge in 22-years as he vies for re-election amid an ailing economy where inflation is tracking north of 40%. While exit polls fluctuated throughout the night and varied significantly between reporting outlets, the official measure shows Erdogan in the lead with 49.3% of the popular vote. However, this isn’t enough to avoid a second round election at the end of the month as nearly all of the votes have been counted. With both leading candidates accepting that a second round is more likely than not, investors are likely to be left in another period of uncertainty, which will likely result in persistent but slow TRY depreciation. As this takes place, all eyes will be on who Sinan Ogan, the third most popular presidential candidate, endorses with his 5.28% of the vote. As we noted in our election preview over the weekend, the policy platforms for both candidates are incredibly divergent, with Erdogan prioritising growth and heterodox economic policies to bring down inflation, while the opposition leader Kilicdaroglu is promoting a much faster return to orthodox monetary policy which would present more near-term pain for investors but provide a much more constructive medium-term investment outlook for Turkish assets.