Market Report - 25/04/2023
Euro outperformance continues; Further rate hikes expected
According to market participants and analysts, sterling is expected to remain under near-term pressure against the euro as markets continue to expect the European Central Bank (ECB) to outpace the Bank of England in raising interest rates over the next few months.
Demand for the single currency was enhanced yet again following comments from a key member of the ECB, prompting the GBP/EUR pair to test levels below 1.13 again, with lows of 1.1285 already being noted. Declines to 1.1270 and then 1.12 are now visible in the chart.
National Bank of Belgium member Pierre Wunch said the market was underestimating the scale of incoming interest rate hikes as inflation would unlikely fall back to acceptable levels unless wage growth retreated. Wunch, who sits on the ECB's interest rate-setting Governing Council, said in an interview with the FT that, "we are waiting for wage growth and core inflation to go down, along with headline inflation, before we can arrive at the point where we can pause.”
ECB president Christine Lagarde said in March higher wages were one of the factors that "could drive inflation higher," when announcing the ECB's decision to raise its deposit rate from 2.5% to 3%. Wages in the eurozone increased at a record pace of 5.7% between the final quarter of 2022 and a year earlier as companies increase pay packets to retain and attract staff.
Following a few weeks of outperformance for GBP versus the USD, analysts from Credit Agricole now predict that the peak in the rate may have been reached, at least in the near term.
The French headquartered global investment bank says although the U.S. Dollar has been weak, it is unlikely to slide into a more protracted downtrend from here.
Three potential reasons for USD resilience:
A less dovish than expected policy pivot by the Fed next week, when it is widely expected that the bank will hike for the last time in the current tightening cycle but also push back against the pricing of rate cuts in the market. The market expects the Fed to raise interest rates by a further 25 basis points on May 03, but the messaging could signal that this is the final hike. Nevertheless the Fed would be keen to press on markets that it would be premature to cut interest rates, which could offer some support to the Dollar.
The GBP/USD rate has risen 3.0% in 2023 with the high located at 1.25. For a retest and eventual break of this level, the Dollar would likely be required to resume its multi-month trend of depreciation.
A final potential source of support for the Dollar will be the perennial question of the U.S. debt ceiling which must be lifted once more. Credit Agricole joins other institutions in expecting the matter to increasingly dominate FX market price action and could further give the USD a boost vs risk-correlated currencies.
EUR/USD is easing toward 1.1000 in the European session, having failed to sustain itself above 1.1050. The pair appears to be heading south, as the US Dollar finds its feet amid a cautious market mood. Investors are now awaiting minutes from key ECB-speakers, US consumer data and tech earnings ahead for fresh impetus into what new levels may be likely for the pair.
Key risk events this week:
Business and Consumer Confidence (EU) – Thursday 10am
Employment data (US) – Thursday 1:30pm
GDP for the US – Thursday 1:30pm
GDP for the EU – Friday 10am
For further information, please get in touch with our team on 020 3950 4132
