February 14, 2023

Another rate rise, but this time its different.

The US Dollar's popularity is decreasing as investors search for higher returns in riskier assets and focus on how interest rate decisions are made.

Since the beginning of 2022, the front runner in world currency has without doubt been the US Dollar, for one simple reason - safety.  

As markets panicked due to wars, political unrest (UK) and inflation, investors ran from risk assets (stocks) in favour of moderately yielding, but essentially risk free, US government bonds.  The result being mammoth  USD strength.

This story is however beginning to change.  As the FED starts to ease back on large scale interest rate hikes, the markets have turned their attention to other central banks e.g. the ECB, who are still championing heartier moves higher, rather than any kind of slow down.  

Stock markets are also painting a much better picture this side of the new year.  The DJI, S&P 500 and the FTSE are all trading above the 200 day moving average.  This lends itself to the weaker USD as markets return to riskier assets in search of yield (remember inflation is still high and bonds are still showing sub inflation level returns).

Regarding yesterdays rate decision, the most important factor is not the result itself, but the fact that 2 of the 9 MPC members voted to keep rates on hold.  This indicates the beginning of a change in sentiment around interest rate policy and is largely why we saw GBP weaken off the back of the rate change, despite higher rates normally resulting in currency strength.

Going forward the market will concern itself less with the outcome, and more with the component parts of how the outcome is reached i.e. does 7-0-2 become 6-0-3 etc.  (the '0' in the middle represents the number of members voting for a decrease in rates).

Whilst GBPUSD has dropped off intra day, mainly due to a particularly over performing non-farm payroll figure, the house view is still upwards in terms of GBP pairs throughout 2023.   Some key technical levels are in sight, which as usual we need confirmation of in order to pick the next moves.

GBPUSD Technical View

Today sees the first move outside the overall uptrend that has been in play since September. The market is however still inside the sideways channel which is important to consider.  

Next key levels to the downside will be the 200 day moving average followed by bottom of the sideways trend.

Upside target remains at 1.2400.

GBPUSD Technical View

GBPEUR Technical View

GBPEUR has found firm support at the botto of the sideways trading range.  The key level of 1.1160 will determine whether it falls back into the long term downtrend. If that happens, 1.1080 becomes the next obvious support.

GBPEUR Technical View

GBPUSD

Higher if:
  • FED continues to ease monetary policy
  • Bank of England rhetoric remains positive
  • UK economy carries on positively from a data perspective
  • Weakening inflation eases pressure on the pound
  • US economic data dampens interest rate expectations
  • FED ends its tightening cycle

Lower if:
  • Inflation remains hard to control
  • Economic data misses target
  • US avoids deep recession
  • Protracted recession in the UK

GBPEUR

Higher if:
  • Europe feels more pain than other developed economies
  • Germany and other Euro leading countries experience deep recessions
  • Economic data is particularly poor, lagging behind UK and US
  • EU Inflation up and growth down

Lower if:
  • ECB hawks drive interest rates faster than expected
  • Eurozone data beats expectation
  • German Bunds (government bonds) become more attractive
  • Emergency energy programs drive flows to Europe

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