A week full of economic data with focus on Europe and the US, we end the week with further data for both areas. But first a recap of what unfolded this week.
We saw the Federal Reserve hike rates on Wednesday, as expected by 25 basis points. In the FOMC minutes afterwards, Jerome Powell did not give much away and said that the Federal Reserve is likely to do one further rate hike in 2023, but it will be data driven ahead of their next meeting in September. With the rate hike expected and no aggressive forecast from Federal Reserve members for the future, the USD dropped off in the middle of the week.
On Thursday, ECB held their interest rate decision – like the Fed they raised interest rates by 25 basis points, which was anticipated. It was not the monetary actions that moved the markets, 30 min afterwards president Christine Lagarde held a speech on their forecast. The tone have changed since its last meeting. Uncertainty on whether they will require to do further rate hikes or pause, effectively stating it’s a maybe for its next meeting in September. Within one hour we saw EUR/USD drop by 1.3% from 1.1140 to 1.0989. Markets did not expect these comments from the ECB, at least not this early in 2023 and with ECB holding a much lower base rate versus the UK and US, market sentiment was that it would require further actions.
Today we have GDP and inflation figures released for Germany, in the last few days IMF reported that UK will outperform German economy in 2023. GDP figures are expected to improve slightly for Q2 compare to in Q1. Inflation levels are expected to decrease slightly to 6.2%, hence after yesterday’s comments from ECB – this could create volatility on the market if it’s far off its predictions.
With both the Federal Reserve and ECB future outlook uncertain regarding further rate hikes, normally this would boost the GBP against both the EUR and USD. So why have we not seen GBP strength since these comments? Well markets are now predicting that BoE will do a rate for August and then potentially pause. Compared to its initial outlook of a further 3 rate hikes, this has caused a sell off of GBP, with people believing GBP has reached its peak.