31.01.23: Month-End Positioning Will Drive Near-Term Sterling and Euro Moves against the Dollar
There is scope for choppy trading on Tuesday due to position adjustment on the last trading day of January.
The central bank decisions on Wednesday and Thursday will also spark high volatility with positioning ahead of the decisions also contributing to volatile trading on Tuesday.
The latest Chinese data recorded a strong recovery in business confidence for January with a substantial bounce, especially in the non-manufacturing sector.
The data reinforced confidence that the abandoning of coronavirus restrictions will lead to a rebound in the economy.
Stronger Chinese demand would help underpin the economy, but the market evidence suggests that a lot of positive news has been priced in and the data failed to trigger gains in equities.
The overall tone surrounding risk appetite is also likely to be less confident in the near term, especially with caution ahead of the latest Federal Reserve policy statement.
Central bank determination to focus on inflation would tend to undermine equities and risk appetite.
Hopes for a rebound in the global economy this year should still limit scope for a negative tone to take root in global markets.
Pound US Dollar Exchange Rate Outlook
The Pound to Dollar (GBP/USD) exchange rate again hit selling interest above the 1.2400 level on Monday and gradually lost ground during the day.
GBP/USD was undermined by a more defensive tone surrounding global risk appetite as Wall Street lost ground with position adjustment also a key element.
In its latest update, the IMF forecasted that UK GDP will contract 0.6% this year and post the worst performance among the G10 countries.
There were, however, expectations that the analysis was slightly out of date.
There are mixed expectations surrounding the Bank of England policy decision this week. The bank is expected to be uneasy over underlying inflation and economic forecasts are likely to be revised higher which suggests a hawkish stance, but there will still be unease that aggressive rate hikes will trigger a deeper recession.
There will also be expectations of rate cuts late this year as inflation declines.
Risk conditions and position adjustment will be important during Tuesday.
Overall, GBP/USD should be able to find support close to current levels.
Euro (EUR) Exchange Rates Today
The latest year-on-year Spanish inflation data recorded a small increase to 5.8% from 5.7% the previous month and well above consensus forecasts of 4.9%. The stronger than expected data triggered some fresh concerns over Euro-zone inflation trends and also sparked speculation that the ECB would need to maintain a hawkish policy stance.
The Euro to dollar (EUR/USD) exchange rate posted gains after the data, but again hit selling interest above the 1.0900 level and gradually lost ground during the day.
A less confident tone surrounding risk appetite tended to curb Euro support and EUR/USD again dipped below 1.0850.
The German inflation data, scheduled for Tuesday, has been delayed, but the Euro-Zone data is still due for release on Wednesday.
There will be caution ahead of key central bank policy decisions this week. Expectations of a hawkish ECB stance should underpin the Euro in the near term.
On a short-term view, EUR/USD should still find solid near-term support on dips.
US Dollar (USD) Exchange Rates Outlook
There were no major US data releases on Monday with the dollar gaining net support from a more defensive tone surrounding risk appetite.
There was also a significant element of caution ahead of the Federal Reserve policy statement on Wednesday.
The dollar index managed a tentative recovery to 1-week highs as global equities lost ground.
The currency overall is still set to post a fourth successive loss.
Barclays notes the communication test for the Fed. According to the bank; “A key challenge for the FOMC will be to execute its transition to smaller rate hikes without furthering expectations that an end to its hiking cycle is imminent.”
In this context, there will be a temptation to take a hawkish stance in order to prevent markets jumping on the rate-cut bandwagon.
Barclays adds; “The post-meeting press conference should be particularly interesting in that respect. We expect Powell to signal a peak rate of 5.1% in 2023, possibly by mentioning that last December’s dot plot by the FOMC remains appropriate.”
Hawkish Fed guidance would tend to underpin the dollar in the short term with some reluctance to sell the dollar into the statement.
Other Currencies
The latest Australian retail sales data was much weaker than expected with a 3.9% slide for December.
The Australian dollar was also hampered by the weaker tone in global equities.
The Pound to Australian dollar (GBP/AUD) exchange rate managed to post a net gain to 1-week highs just above 1.7550 before settling just below this level.
The Pound to New Zealand dollar (GBP/NZD) exchange rate briefly posted a 1-week high at 1.9160 before a retreat to 1.9130.
The Pound to Canadian dollar also secured a net advance to just above 1.6550.
The Swiss franc lost ground on Monday despite weaker global equities.
The Pound to Swiss franc (GBP/CHF) exchange rate posted 1-month highs near 1.1435.
The Day Ahead
The US will release the latest data on consumer confidence with expectations of a further small improvement for the month.
New Zealand will release the latest labour-market report for the fourth quarter of 2022 with expectations of a small employment increase.
Markets will still on alert for any unofficial Fed briefings through the Wall Street Journal ahead of Wednesday’s decision on interest rates.
There is also the potential for ECB leaks.
Euro-Zone GDP data will be released for the fourth quarter with consensus forecasts of a 0.1% contraction.
Read More: Month-End Positioning Will Drive Pound Vs Euro, Dollar