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Last week’s USD comeback faded into the end of the week; will this week see further disappointment?

In the midst of a slew of data releases, speeches and surveys, last week saw the USD make solid gains against other currencies for the majority of the week, only to hand some of it back towards the very end, and for reasons that did not appear macroeconomic in nature. 

The recovery of the GBP and EUR on Friday occurred while the market was still considering the consequences of weaker-than-expected consumer price inflation data from the UK. This was in addition to confirmation of the continued downtrend in Euroland CPI (Consumer Price Indices), weak activity figures from Euroland in the form of December industrial production data, and signs from the UK labour market that while headline employment looked strong, employers were reducing full-time headcount in favour of part-time or temporary staff.

So what about this week, and the trajectory for GBP and EUR against the USD?

The markets are still towards the bottom of recent ranges for GBPUSD and EURUSD, despite Friday’s improvement. The outlook for both currency pairs could well be governed more by speeches from central bankers such as Mann, Cunliffe and Tenreyro from the BoE (Bank of England), and Williams, Daly, Bostic and Mester from the Federal Reserve. Only De Cos is expected to speak from the ECB (European Central Bank). The message has been reasonably clear from both the Fed and ECB that they will continue to tighten (ECB appear locked into a 50-basis point hike in March), but from the BoE the message is more nuanced, suggesting rates could be very close to their peak. For FX markets, this is all broadly built in, but is there still the prospect of the ECB and Fed being more hawkish than anticipated even as the BoE disappoints?

GBPUSD could find it hard to sustain any upside momentum beyond the low $1.21 region, while EURUSD still appears at risk of a push lower, towards a break of $1.06, which could open the downside up further to January lows in the high $1.04 region ($1.0484 according to Bloomberg). There appears nothing in this week’s data calendar to offer the FX markets much semblance of consistent macroeconomic direction but what about elsewhere?

Energy prices continuing to fall offers hope for an additional reduction in other commodity prices

Natural gas prices continued to fall last week, and although there are no breakthroughs for ending the Russian occupation of Ukraine, there has been no deterioration in the current situation either. Last week’s Munich Security Conference did see a number of African and Asian nations complain about the effects that the invasion and sanctions have had on their economies, suggesting that not all nations are as supportive of NATOs stance as the vast majority of European or North American nations are. However, the drop in gas prices does offer further disinflationary impetus, alongside another sharp drop in freight costs recently. Perhaps there is more room for falls in gas and electricity prices, which could reduce the large energy input cost into commodity production, in my view.

Central banks seem less inclined to hike; Turkey could hurt the lira with a cut

Last week only saw the central banks of the Philippines and Indonesia announce on monetary policy, and both did what was expected of them, a 50-basis point hike from the Philippines central bank and no change from Bank Indonesia. This week, hikes are expected from Israel and New Zealand, while the central bank of Turkey is predicted to cut 1 percentage point from its repo rate, taking it to 8%, the lowest it will have been in 5 years. Will that harm the lira though? It certainly won’t help it make any additional gains against major currencies, and I still see the risks to the lira being skewed towards further weakness.

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