Dollar Weakness Results in a 3-month High in GBP/USD

The British pound has risen to a 3-month high against the U.S. dollar on expectations that the Federal Reserve could slow the pace of interest rate hikes and a new U.K. Government budget proposal. The recent move higher in has now erased all losses recorded during Liz Truss’s tenure.

Earlier this week, from the most recent FOMC meeting indicated that the U.S. central bank could ease the pace of interest rate hikes at the next meeting on Dec. 15, after delivering four consecutive 75 basis points (bps) rate increases. The Fed has imposed a total of six interest rate hikes so far in 2022, lifting the interest rates by a total of 375 bps – the bank’s fastest tightening in around 40 years.

A Mix of Weak Dollar and Improving UK Fundamentals

The tight monetary policy, aimed at fighting 4-decade high , has driven the to the highest level in 20 years, with the greenback rising more than 8% against the euro since the start of 2022. U.S. inflation slightly eased to 7.7% in October, though still a far cry from the Fed’s target of 2%.

A possibility of a 50 bps interest rate hike next month has weighed on the U.S. dollar, and the greenback’s weakness is one of the main factors behind the pound’s 20% jump since hitting an all-time low during the mini-budget debacle in September.

A recovering sterling bodes well for businesses and consumers, and could in turn help push down the rampant inflation driven by food and energy costs. However, despite the recent jump, the pound remains down against its U.S. counterpart this year.

Analysts believe that the new U.K. prime minister Rishi Sunak has restored the embattled investor confidence in the country’s financial credibility, mitigating the risk of purchasing sterling-denominated assets.

“Investors feel Rishi Sunak appears more resolute than his predecessor in trying to address rising borrowing costs,” said Fawad Razaqzada, an analyst at City Index, one of the most popular forex brokers in the UK and a columnist at

BoE’s Warning About Inflation

Meanwhile, the Bank of England’s (BoE) deputy governor Sir Dave Ramsden warned the central bank could keep raising interest rates if inflationary pressures persist. Ramsden’s remarks challenged chancellor Jeremy Hunt’s views that the recently announced £55 billion budget proposal would allow for “significantly lower” interest rates.

The budget plan, which came as a part of the UK government’s Autumn Statement, outlined significant tax hikes and spending cuts. Ramsden argued that:

“[The measures] do not come into effect until April 2025 so will have very little effect over the Monetary Policy Committee’s (MPC) three-year forecast horizon, relative to what was assumed in the November monetary policy report.”

The BoE said in the past it would revisit its interest rate plans if the Autumn Statement measures made an immediate impact on inflation and the country’s economy. However, Ramsden is still of the view that the BoE must continue tightening the monetary policy. He said:

“I expect that further increases in the bank rate are going to be required to ensure a sustainable return of inflation to target.”

Ramsden stated clearly that the BoE is considering another jumbo interest rate increase at the next meeting in December if he saw that companies were able to raise prices further and increase wages notably higher than the 2% inflation target. He added he will continue to “respond forcefully” if the outlook indicates that inflation will persist in the future.

The BoE hiked interest rates by 50 bps in August and September, and by another 75 bps in October, taking the official rate to a 14-year high of 3%.

Rokos Capital Management, a hedge fund led by billionaire Chris Rokos, said the British pound still appears “vulnerable” to new declines, adding that the looming inflation could have significant implications on British society.

The hedge fund told investors that Britain had suffered a heavier blow compared to other developed countries due to several factors including Brexit, de-globalization, and the coronavirus pandemic. Such a gloomy outlook is making it increasingly challenging for UK lawmakers to tame the raging inflation, Rokos Capital Management wrote in a letter to investors.

“The recession that is required to tame inflation in the UK is deeper than that needed elsewhere, with potentially serious societal implications. Sterling looks vulnerable.”

Rokos added that it could become more optimistic about Britain’s prospects in case of a “softer Brexit” or higher immigration.


The fall in U.S. bond yields has fueled a rally in stocks and bonds, while also sending the U.S. dollar lower from its multi-year highs. The drop in the greenback has coincided with improving risk sentiment in the U.K., ultimately sending GBP/USD to over 1.20 again, which is a 3-month high for the major currency pair.

FX Daily: Sprinting Back to Defense

Despite a goal-rich start at the World Cup in Qatar, markets are all about defense right now. New Covid restrictions in China are fuelling a return to the safe-haven while investors wait for tomorrow’s FOMC . This may be laying the groundwork for a broader USD recovery into year-end. Elsewhere, we expect a 50bp rate hike by the RBNZ

US Dollar: Recovery mode

China’s Covid situation has suddenly returned as a very central driver for global markets this week. Over 27,000 cases were reported yesterday, with the city of Guangzhou being the new epicentre of the outbreak, and local authorities are reportedly scrambling to impose those same restrictive measures that appeared a thing of the past after recent signals from the central government that the zero-Covid policy would be gradually abandoned.

In FX, this has fuelled a return to the dollar. After all, optimism on China’s outlook was one of the two key forces – along with speculation about a dovish pivot by the Fed – behind the sharp dollar correction earlier this month. On the Fed side, today’s minutes will be important to watch, but the recent Fedspeak has undoubtedly added a layer of caution to the dovish pivot enthusiasm, which could mean investors may also be more reluctant to overinterpret dovish signals from the minutes.

Another theme to watch will be the reported OPEC+ plans to increase output. The news caused an acceleration in the crude sell-off, with trading below $85/bbl before recovering after the Saudis denied the reports. Should output hike speculation mount again, expect some pain for commodity currencies, as the combination with resurging Covid restrictions in China could prove quite toxic.

We continue to see the dollar at risk of new brief bearish waves this week, but we note that the environment has now turned more benign for the greenback, and this may be laying the groundwork for a re-appreciation into year-end, which is our baseline scenario. We could see some consolidation around 107.50/108.00 in DXY today. Remember that liquidity will run significantly thinner in the second half of the week as the US enters the Thanksgiving holiday period.

Euro: Preparing for a longer downtrend

plunged back to the 1.0250 area as markets jumped back into defensive dollar trades. Indeed, the negative impact of China’s new Covid wave on the rather exposed eurozone economy and of an ever-concerning situation in Ukraine are overshadowing the positives of lower energy prices. We see further room for a contraction in EUR/USD this winter and continue to target sub-parity levels into the new year, as discussed in our 2023 FX Outlook.

Expect some support at 1.0200 in EUR/USD: a decisive break below that level could underpin the return to a bullish dollar narrative and unlock more downside risks.

New Zealand Dollar: We expect a 50bp hike by the RBNZ

The Reserve Bank of New Zealand will announce monetary policy at 0100 GMT today, and it is a close call between a 50bp and a 75bp hike. As discussed, we see 50bp as more likely, as signs of an accelerating housing market contraction warn against an overly aggressive approach. Markets (66bp in the price) and the majority of economists are, however, leaning in favour of a 75bp move.

New rate and economic projections will also be released, and there are some key questions to be answered. The first of these is where the RBNZ will place the peak rate, which is currently at an unrealistic 4.10% (rates are at 3.50% now), so should be revised to 5.0% or higher, and how many cuts will be included in the profile. The second is how much more pain will be included in the forecasts for the housing market. Third is how fast inflation is projected to drop given the higher CPI readings for 3Q but more aggressive tightening.

A half-point hike would likely be seen as a dovish surprise by markets at this point, but a significant revision higher in rate projections could mitigate any negative impact on the New Zealand dollar. Either way, expect any post-meeting NZD moves to be short-lived, as global risk dynamics and China news will soon be back in the driver’s seat for the currency. is at risk of falling back below 0.60 before the end of this year, while we target a gradual recovery to 0.64 throughout the whole of 2023.

Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user’s means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

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Where Is the Ceiling for EUR/USD Bull Rally?

is attempting to keep its head above the key near-term resistance after staging a near 8% rally off November lows. The U.S. dollar pushed back on Thursday after new U.S. retail sales data challenged recent claims that the pace of the Fed’s interest rate hikes can be slowed following the cooler-than-expected inflation report for October 2022.

Data for October showed that increased by 1.3%, ahead of consensus estimates of 1%. While this shows that the U.S. consumer is still healthy, despite a recent from Target (NYSE:) that would suggest otherwise, it also suggests that the Fed could opt not to slow down its aggressive hiking cycle.

“Markets have positioned for the Fed to pivot (but) the U.S. retail sales data very much challenges that narrative,” said Kim Mundy, a strategist at Commonwealth Bank of Australia.

“The U.S. economy is driven by the consumer, and if the consumer is still spending, it suggests it’s going to take inflation longer to ease.”

The data boded well for the U.S. dollar, driving the to 106.94, marking an increase of more than 0.6%. The , which hit a 20-year high earlier this year, bounced back from a three-month low of 105.30 it hit on Tuesday.

Analysts Divided

Mary Daly, president of the San Francisco Fed and one of the most dovish central bank officials, also said a pause in interest rate hikes is not yet an option following the latest U.S. retail data. On a similar note, Kansas City Fed President Esther George said lawmakers must be cautious and not “stop too soon” with the rate hikes. She also said that avoiding a recession remains a challenging task for the U.S.

Current data from the Treasury market suggests that an economic slowdown can be expected as the gap between 10-year and 2-year U.S. government bonds widened to 67 basis points – similar to the one seen during the 2000 recession.

Prior to the retail data, the euro saw a sharp rebound from its 20-year low, driven by a substantial selloff in the greenback following the latest print in the U.S. that showed that inflation eased to 7.7% in October, compared with consensus estimates of 8%.

The EUR has surged about 5% against the USD this month, hitting its highest level since July 2022. In the meantime, currency analysts are divided on where the dollar may be heading next.

ING economist Rob Carnell said it is likely that the U.S. dollar has already peaked, despite its latest jump.

Said Carnell:

“In order to think that there is much more dollar upside, you really have to anticipate there is going to be some tightening that we haven’t expected … and that somewhere in all of this there’s a much bigger stock correction, which could send us back into a significantly risk-off mode that we’ll want to just buy all things dollar again.”

But despite the rally, analysts at UBS Global Wealth Management, Russell Investments and Insight Investment remain skeptical about whether the euro can maintain its sharp recovery.

The skepticism comes after the euro showed weakness on the reports of a missile hitting Poland, suggesting that the currency is highly exposed to the Russian-Ukraine war developments. Moreover, analysts believe that the possibility of the European Central Bank (ECB) slowing interest rate hikes could limit its gain potential as the bloc continues to grapple with record-high inflation.

The euro’s rally has likely ended for now, “unless we get another bout of stronger-than-expected data or more positive news flow on the energy situation,” said Dean Turner, an economist at UBS Global Wealth Management.

Turner expects the euro to have a difficult time ending the year above 1.04. He thinks that there is still no great level of confidence that the recent rally could strengthen further.

From the technical perspective, the 1.0350 is a key bull/bear line in the near term. If EUR/USD fails to keep its head above this level by the end of the month, it is likely that we will see a change in the direction, with the major currency pair likely to hit levels below the parity once again.

The bulls also seem to be struggling to break the resistance around 1.0420, where the 200-day moving average is located. A clean break of this zone would open the door for the continuation of this bear market rally, possibly towards 1.06.

Final Thoughts

The euro plummeted to a 20-year low against the U.S. dollar in September, after breaking its parity with the greenback in July due to concerns that Europe could see an energy shortage this winter. The single currency has recovered around 9% over the past two months, though most of its gains came from a sell-off in the dollar.

While trading activity on major forex brokers increases as investors are placing their bets on the Fed pivot, we’re also seeing a jump in equities. Any new data that points towards a still-hot U.S. economy will likely force Fed officials to reiterate their stance towards more rate hikes. In this case, the EUR/USD is very much heading below parity and possibly to the new multi-decade lows before the year end.

FX Daily: Extra Dose of U.S. Dollar Weakness

The is inching lower again this morning and we think the ongoing correction could extend a bit more as optimism on US-China relations appears to be lifting sentiment. That said, a broader and sustained US Dollar downtrend on the back of the China and/or Fed pivot story appears premature. Today, keep an eye on the and UK pre-Budget headlines

US Dollar: A bit more pain

The dollar showed tentative signs of recovery yesterday, but appears to be lacking any strong support at the moment. While we don’t buy the one-way traffic, and the USD-bearish narrative in the longer run, there may be extra downside room for the greenback this week.

With the US calendar being rather light, the two main drivers of global sentiment are China and Fed speakers. With respect to the first, there are two aspects to consider: data and diplomatic talks. Chinese industrial production and fixed asset growth numbers for October were in line with consensus, but the retail sales drop (-0.5% year-on-year) came as a surprise. Still, retail sales are highly sensitive to Covid restrictions, and the recent progress towards more flexible rules suggests room for recovery. Asian equities are rallying this morning, and this appears to be due to general optimism after a long meeting between US President Joe Biden and Chinese President Xi Jinping at the G20 meeting yesterday, which was followed by mildly encouraging remarks about diplomatic cooperation.

We still suspect it is too early to point at China as the key driver for a broader recovery in risk sentiment (and dollar descent), considering the still sizeable economic challenges affecting China going beyond its Covid policy (e.g. real estate fragility, slowing global demand).

On the Fed front, we heard from both sides of the hawk-dove spectrum yesterday. The hawk Christopher Waller dismissed the deceleration in core inflation as just “one data point” and that more data was needed to conclude tightening should slow. The dove Lael Brainard also signalled there is more work to do, but explicitly said the Fed will likely shift to slower rate increases soon. It appears that the FX market was primarily affected by Waller’s remark, with the ultra-Fed-sensitive yen dropping around 1% yesterday. For now, we read recent Fedspeak as further indication that a bearish dollar call on the back of Fed dovish pivot bets still appears premature.

Today, we’ll hear from the Fed’s Patrick Harker, while the data calendar includes October and figures. Some extra near-term USD weakness is possible, but we suspect we are reaching the bottom of the recent downtrend.

Euro: Eyes on ZEW

November’s ZEW survey is the main release to watch in the eurozone’s calendar today, and expectations are for a generalised improvement on the back of lower energy prices. Later this morning, it will be worth watching for any revision in the eurozone’s third-quarter numbers. We’ll also hear from the ECB’s Francois Villeroy.

strength is largely a USD story, and any support to the euro appears largely driven by energy prices, if anything. We could see another leg higher in the pair over the coming days, and 1.0500 could be at reach, even if we expect a relatively fast descent over the winter.

Pound Sterling: More Budget-related headlines

Ahead of the Autumn Budget announcement in the UK this Thursday, markets are being flooded with reports about which measures will be announced. Chancellor Jeremy Hunt is now widely expected to deliver a 40% windfall tax on energy companies’ excess profits, while it’s been reported that the minimum wage will be raised from £9.50 to £10.40 an hour. Expect more headlines – and some reaction – today.

On the data front, jobs numbers were released in the UK this morning. As expected, the edged higher but was mostly driven by hiring freezes rather than rising redundancies. Reduced labour supply remains a bigger concern, especially as long-term sickness numbers continue to rise. Our economics team continues to expect a 50bp hike by the Bank of England in December.

Swedish Krona: Riksbank may go for 75bp after all

The Swedish inflation report this morning was a mixed bag. Headline rose less than expected (from 10.8% to 10.9% YoY), CPIF inflation surprisingly declined (from 9.7% to 9.3%) but core CPIF rose (7.4% to 7.9%). Ultimately, the latter may matter more than the others for the Riksbank, which announces policy on 24 November, and that may tilt the balance towards a 75bp rate hike.

Implications for the krona should however remain quite limited – today’s muted FX reaction to CPI was a case in point. We think SEK remains in a disadvantageous position compared to other procyclical currencies to benefit from an improvement in risk sentiment given the still clouded European outlook. We see room for a return toward 10.90/11.00 in in the near term.

Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user’s means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

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Rates Spark: About These Tightening Swap Spreads

Whilst supply runs its course this week, and the macro-focused participants await tomorrow, one development that has caught our attention is the sharp tightening of swap spreads. There is often more than one possible driver but one starting point is the German treasury’s decision in late October to boost the amount of bonds lent on the repo market, by €54bn, to finance part of its energy support package. Bloomberg reported yesterday that, according to its sources, net issuance of German debt should reach €45bn in 2023, nearly three times the originally planned €17bn.

Germany is the euro bond market where scarcity is most acute so both pieces of news go a long way towards alleviating fears that the last two months of 2022 would see a dash for collateral. Other factors, such as the increased chatter of European Central Bank intervention, or hopes that early targeted longer-term refinancing operation (TLTRO) repayments would release some collateral might have helped, but we list them only as secondary drivers of the collateral situation.

ECB purchases and austerity have led to a scarcity of German government debt:

German Government Debt, ECB Purchases

German Government Debt, ECB Purchases


Improving Sentiment May Play a Role, but So Do Cautious Investors

Then there are the macro drivers, including decreased risk aversion after the perceived central bank pivot, and generally better performance of risk assets. These feel harder to pin down in our view. Firstly, it is true that swap spreads tend to widen when risk aversion increases, but regular readers know that we don’t really think there is much of a ‘pivot’ for investors to celebrate. Secondly, collateral scarcity have tended to dominate other factors in the past, so this seems a more logical explanation to us.

Finally, we would not underestimate the effect of near-term debt issuance. Admittedly, this week’s slate is by no means the heaviest of the year, but we expect investors to be particularly reluctant to buy bonds as the end date of this tightening cycle seems to be pushed further away into the future. The barrage of hawkish comments from the likes of Kazaks and De Guindos yesterday attest to this risk.

2-Year German Swap Spreads, 3-Year Bubill Vs. Ois

2-Year German Swap Spreads, 3-Year Bubill Vs. Ois

German swap spreads have tightened but T-bills remain stretched against OIS swaps.

FX Daily: Cash Parked on the Sidelines

The remains in correction mode and the market is watching the news from China regarding the approach to its Covid-19 policy. Today’s market focus will be on the US mid-term elections. We expect the Romanian central bank to raise rates by 50bp to 6.75%, which may be the central bank’s last move in this hiking cycle

US Dollar: The known unknowns

The dollar remains in corrective mode as investors, very underweight in both equity and bond markets, stand ready to adjust positions on the latest headlines out of China. Here, China’s zero-Covid policy represents a ‘known unknown’ for the market and one where any significant relaxation could unleash a wall of cash parked on the sidelines in dollars. Active investors would not want to be caught out by a year-end rally in risk assets.

Some concrete news on China’s Covid policy would probably trigger more of a dollar correction, but until then FX markets will be dragged around by two key factors: central bank policy and energy prices. A recent BIS paper looking at this year’s dollar rally picks out those two factors and concludes that, with real rates still negative in many countries, it would be dangerous to be too concerned with the over-tightening of monetary policy.

Fears of over-tightening do not seem to be present in the US currently, where money markets are continuing to price the Fed cycle higher and later. Perhaps one factor we are underestimating here is that a more drawn-out Fed tightening cycle is delivering a drop in volatility and a fillip to the carry trade. Certainly, US interest rate volatility has started to drop.

For today, the focus will be on the US mid-term results. Although the immediate impact on the dollar will be muted ahead of the main event risk this week – October US data on Thursday.

DXY should continue to find support this week below 110.

Euro: Staying above parity is no easy task

climbed back above parity yesterday, still driven by a softer dollar and relatively upbeat risk sentiment. In the eurozone, we continued to hear calls for more tightening, with European Central Bank president Christine Lagarde and Governing Council member Francois Villeroy de Galhau both maintaining a hawkish tone. We doubt, however, this is offering idiosyncratic support to the euro at this stage.

Today, the eurozone data calendar includes for the month of September, which are expected to have climbed on a month-on-month basis. ECB Governing Council member Joachim Nagel is speaking this morning, and we can surely expect more hawkish comments on his side.

While the US inflation report and the mid-term elections are two key risk events for the dollar, macro factors continue to point at a weaker EUR/USD, and we doubt that with the economic uncertainty in the eurozone ahead of the winter and a still hawkish Fed the procyclical EUR/USD will easily remain above parity in the coming weeks.

Pound Sterling: BoE Gilt sales meet lukewarm demand

Lukewarm demand at yesterday’s Bank of England 7-20Y Gilt auction saw Gilts selling off and dragging other bond markets with them. Our debt strategy has been pointing out that investor demand is for shorter-dated Gilts and that £6.25bn worth of Gilt auctions later this week will not have helped the BoE’s gilt auction. Soft demand at the auction and the subsequent Gilt sell-off did not inordinately hurt sterling, however, which seems to be settling down a little.

For today, the focus will be on some speeches from the BoE’s Huw Pill and Catherine Mann. Somewhat surprisingly, the pricing of the BoE cycle does not seem to have moved much since the immediate volatility following last Thursday’s Monetary Policy Committee meeting. And the FX market may now be wholly focused on the amount of fiscal restraint coming through on 17 November. We continue to favour the view that rallies over 1.15 are not sustainable.

Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user’s means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

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Bank Of England Signals Markets Are Overestimating Future Rate Hikes

The Bank of England faced a choice today between a ‘hawkish’ 50 basis-point rate hike and a ‘dovish’ 75bp – and in the event, it chose the . Unlike the and the , this is the first time the BoE has hiked by 75bp in this cycle.

But there are no good options for the Bank, and the central message from its latest communications is clear: investors are expecting too much tightening at future meetings. We think today’s 75bp move is likely to be a one-off.

The BoE’s new projections show that, if policymakers were to follow investor expectations and hike rates to 5%, the size of the economy would shrink by roughly 3 percentage points over several quarters. Inflation would be at zero in 2025.

The Bank of England is forecasting a deep recession regardless of whether it hikes any further.

U.K. GDP During Recessions

U.K. GDP During Recessions

Curiously the message is similar – though far less extreme – in the Bank’s projections based on interest rates staying flat at 3% from now on. Not only does that suggest markets are overdoing tightening expectations, but at a pinch you could also say this hints at potential rate cuts somewhere down the line.

Admittedly the Bank has been telling this story to a more limited extent for several months now in its forecasts. Governor Bailey also highlights that there’s an upward skew to its inflation forecasts, and policymakers are unsurprisingly nervous about putting too much weight on its models at a time of such uncertainty.

75bp Hike Likely To Be A One-Off

Nevertheless, Andrew Bailey was very forthright in his press conference that rates are unlikely to rise as far as markets expect (currently just shy of 5%). What’s more, the committee is very divided. One policymaker, Silvana Tenreyro, voted for just 25bp worth of tightening today.

The Bank may have stepped up the pace this month, but central banks globally are having to assess whether ongoing aggressive rate hikes can be justified at a time when housing and corporate borrowing markets are beginning to creak.

The choice the Bank faces at coming meetings is one of hiking aggressively to protect sterling, or moving more cautiously to allow mortgage rates to gradually fall. With around a third of UK mortgages fixed for just two years, we suspect the latter option will increasingly be seen as more palatable. The dovish messages littered throughout today’s statement and forecasts are a clear sign of that. We’re pencilling in a 50bp rate hike in December and we think the Bank rate is unlikely to rise above 4% next year.

FX Daily: Volatility Set To Stay High

It is a busy week for FX markets, with key policy rate meetings on both sides of the Atlantic and some tier-one data releases. The question to be answered this week: is the Federal Reserve ready to pivot? We would argue that the Fed has less cause than many to pivot. And weak growth overseas should mean that it is too early to unwind long dollar positions

USD: Wednesday’s FOMC Will Dominate

FX markets this week will be dominated by Wednesday’s and whether the Fed provides any oxygen to the idea of a pivot – or a shift to a slower pace of tightening. As we discuss in our FOMC preview, the Fed faces several challenges here, but we suspect the bar is quite high for a pivot and we feel it is too early to call time on the dollar’s rally. After all, the market in effect already prices the pivot (pricing a 75bp hike this week and a 50bp hike in December) and we suspect the chances of another 75bp hike in December are under-priced. In addition, this week sees a whole raft of US data culminating in Friday’s nonfarm employment data. We forecast 220k in job gains and an unemployment rate of 3.6% – still below the 3.8% the Fed forecast for year-end. Recall that even with the unemployment rate rising to 3.8%, the Fed’s dot plots had assumed that a policy rate in the 4.25-4.50% area would be appropriate for the end of this year.

As always there are two sides to the dollar story – what’s going on at home and what’s going on abroad. High beta currencies like the Norwegian krone, New Zealand dollar and British pound have been some of the best performers against the dollar over the last month. That has largely been due to the turnaround in sterling. But as my colleague James Smith discusses in his Bank of England (BoE) preview, the BoE may well disappoint with just a 50bp hike. A weaker tone in sterling could undermine the recent renaissance in European currencies and push more wind back into the dollar’s sails. At the same time, Chinese data continues to disappoint, with the October composite PMI dropping back into contraction territory for the first time since May.

In short, it looks as though the dollar’s month-long, 4.5% correction could have ended last Thursday and events this week could prove a catalyst to send the dollar back towards the highs. Our base case does see the dollar retesting the highs later this year. A break of 111.00/10 in today could open up a move to the 111.80 area.

EUR: Markets Still Price A 75bp ECB Hike In December

The eurozone continues to battle with inflation and today should see the release of a new cycle high in CPI at 10.3% year-on-year – and potentially even higher given the release. Today we will also get a first look at 3Q22 eurozone , expected at 0.1% quarter-on-quarter. The news may temporarily push eurozone rates higher, even though a 75bp hike is virtually priced for the 15 December ECB meeting. Ultimately, however, our macro team believes the ECB will only hike 50bp in December and that the terminal rate for this cycle proves to be in the 2.25% area rather than the 2.80% currently priced by the markets. And bluntly, the ECB has far more cause than the Fed to pivot.

With global growth under pressure from tighter rates and a misfiring Chinese economy, we think the eurozone and the euro will continue to struggle. That is why last Thursday’s high of 1.0089 in could have been significant. A close back under the 0.9900/9910 area this week would support our preferred view of EUR/USD retesting the lows near 0.95.

GBP: Thursday’s BoE Could Do Some Damage

is consolidating above the important 1.1500 level, holding onto recent gains. The highlight this week will be Thursday’s Bank of England meeting. The market firmly prices 75bp, but we think the risk of a softer 50bp is under-priced as the BoE prepares for the coming recession. As we have argued previously – now that a lot of the fiscal risk premium has come out of sterling – the forthcoming tighter fiscal and more dovish than expected monetary policy could prove a bearish combination for sterling. We are dollar bulls and would thus favour GBP/USD breaking back under 1.1500 based on this week’s confluence of events.

This would also point to current losses under 0.8600 proving short-lived.

CEE: Tough Times Are Back

This week we have a busy calendar not only at the global level but also in Central and Eastern Europe. Today we start with Polish inflation, which will be crucial for next week’s National Bank of Poland meeting. We expect a jump from 17.2% to 18.1% year-on-year, slightly above market expectations, mainly due to higher fuel, energy and food prices. Tomorrow in the Czech Republic, 3Q GDP data, October PMI and the state budget result will be released. The first GDP result in the region should show a contraction in the economy and confirm the start of a shallow recession. On Wednesday, we will see October PMIs in Poland and Hungary, which will confirm the downward trend in industrial sentiment.

On Thursday, the highlight of this week is the Czech National Bank meeting. In line with the market, we expect interest rates to remain unchanged. A new forecast will be presented which will show lower inflation but higher wage growth, which together with the cost of FX intervention is the main risk for us in terms of a possible additional interest rate hike at the coming meetings. However, we consider the CNB hiking cycle to be finished.

The FX market in the region will be dominated by global events in the coming days. Already last week, the positive trend in CEE was halted by the ECB meeting. This week will see a series of central bank meetings led by the Fed. Therefore, we see both support from high-interest rate differentials in the region and EUR/USD as being at risk. In addition, gas prices have been rising again in the last two days and many of the reasons for the strengthening trend in the CEE region over the past two weeks are now dissipating. Of course, at the local level, we will be watching the inflation numbers in Poland and the CNB meeting in particular but this week speaks strongly against CEE FX.

We see the Czech koruna as the most vulnerable at the moment, which will again be the focus of short positioning ahead of the central bank meeting. We will likely see a move towards the 24.60-24.70 levels. The Hungarian forint is likely to look above 415 again. On the other hand, the Polish zloty should be best positioned this week, supported by a high inflation number and an increase in NBP rate hike bets.

Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user’s means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

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Euro And ECB Crib Sheet: Hawks Can’t Lend Their Wings To The Euro

Here are our four scenarios for the European Central Bank and their related implications for the currency and rates markets. A 75bp ECB hike is our call; it’s what markets are expecting too. Attaching a hawkish tone to the hike should – like in previous instances – fail to offer substantial and long-lasting support to the euro

EUR and ECB crib sheet

ECB Crib Sheet

We expect the ECB to hike by 75bp at the October meeting

This has become a consensus call in recent weeks, and markets are fully pricing in such a move. This means that – barring a surprise on the size of the hike – the market reaction will depend on the ECB’s stance on:

  • Further rate rises: any tweaks to the meeting-by-meeting data-dependent approach and/or references to the terminal rate
  • Changes in the inflation and growth outlook
  • Discussion over quantitative tightening

In our ECB preview, we highlight what we expect to hear on those topics this week. Here you can see where we’re coming from; it’s our usual pre-meeting scenario analysis, where we look at implications for and the rates market to those different potential outcomes.

A 75bp hike will not be a game-changer for EUR/USD

As shown above, we see limited upside risks for EUR/USD in the aftermath of the ECB announcement. This is mainly due to the weakened correlation between short-term rates and currency dynamics in the eurozone. This means that additional tightening being priced into the EUR curve on the back of a hawkish statement still looks unlikely to offer a sizeable, and above all, sustainable support to the euro.

This was indeed the case in the past few meetings, where the ECB consistently surprised on the hawkish side but that did not avert a euro depreciation. A tightening-based FX protest (against the inflationary weak euro) is simply not working in the current market environment.

In line with our expectations of a stronger dollar, as the Fed keeps tightening policy and keeps risk sentiment weak into the new year, we expect a drop below 0.9500 in EUR/USD by the end of this quarter.

Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user’s means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

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FX Daily: People’s Bank Of China Loosens Its Hold On The Renminbi

As the FX market awaits the big ECB and Fed meetings over the next week, the hottest topic right now is what Chinese authorities are doing with the renminbi. Having tried to stabilise it since late September, a much higher fixing yesterday suggests the PBoC is prepared to let market forces have a greater say. This is a dollar-positive story

US Dollar: Episodes of renminbi weakness have helped the dollar more broadly

The conclusion of the Communist Party congress in China has garnered much market attention over the last few days and culminated in intense pressure on Chinese equities yesterday. Here is my colleague Iris Pang’s take on what personnel changes mean for economic policy direction. Iris has had a good call on USD/CNY as she has made the case for 7.40.

USD/CNY has been pressing the upper limit of its +/- 2% daily trading range around the onshore fix. Notably, the People’s Bank of China (PBoC) had been fixing USD/CNY flat near 7.11 since late September – presumably to provide some stability to the renminbi ahead of the National Congress. But overnight – and now that the Congress is finished – the PBoC has allowed an onshore fixing much higher at 7.1668. This suggests it will now allow market forces to play a greater role in setting the USD/CNY rate. At the same time, the PBoC has adjusted macro-prudential factors to allow Chinese institutions to take on greater FX borrowing – a liberalisation of inflows to China. Yet this measure looks far more indirect than control of the USD/CNY fixings or emulating Japan in aggressive outright FX intervention in spot markets. 7.40 certainly looks like the direction of travel for USD/CNY now.

The reason we dwell on renminbi developments is that the two episodes of PBoC-sanctioned CNY weakness earlier this year (mid-April to May, and mid-August to late September) saw some of the strongest dollar gains of the year. Some currencies are directly managed against the CNY – for example, the Singaporean dollar – but many emerging market currencies and pro-risk currencies in the G10 space (including the euro) have strong positive correlations with the renminbi. A move in USD/CNY to 7.40 or higher should provide a supportive backdrop to the dollar over the coming weeks.

For today, the US data highlight will be the October reading. This has recently bounced given lower gasoline prices and good employment prospects. We doubt the data has much impact on Fed pricing, where the terminal rate is still priced near 4.90% for next Spring. to trade a 111.50-112.50 range.

Euro: IFO should add to the gloom

The focus of the European morning will be the data. As my colleague Peter Vanden Houte discussed when reviewing the PMIs yesterday, it looks as though the eurozone is already in recession. Another soft IFO reading today will add to that sentiment but is unlikely to have much bearing on Thursday’s ECB meeting. We have released an ECB cribsheet looking at scenarios for Thursday. ECB hawkishness has not helped the euro this year and rallies may well be capped around the trend channel at 0.9950.

The Hungarian central bank meeting is on the agenda today. After the emergency rate hike in mid-October, we expect today’s decision to be a non-event. This is backed up by the stronger levels of the Hungarian forint, which is supported mainly by the sharp drop in gas prices in recent days and the calming of the energy crisis. Although the National Bank of Hungary does not need to hike rates again at the moment, we expect the central bank to confirm its readiness to act if the forint decides to weaken again. Considering that HUF remains sensitive to global risk aversion, we cannot rule out some periodic correction. For the time being, however, the forint should remain supported and enjoy this moment of peace created by recent central bank actions and global conditions. Thus, we expect the forint to return to the 405-410 range.

Pound Sterling: ‘Profound’ challenges will delay any sterling re-rating

Rishi Sunak will be given the keys to 10 Downing Street today. He has talked up the ‘profound’ challenges facing the UK economy, following on from Chancellor Jeremy Hunt’s remarks that ‘eye-watering’ decisions will have to be made on spending decisions. Sunak has been voted in on a ticket of fiscal rectitude which may be good for gilts, but less good for sterling. True, the UK’s sovereign risk has been re-priced lower (e.g. the UK’s 5-year credit default swap trading back to 32bp from 52bp), but the prospective policy mix of tighter fiscal/less tight than thought previously, monetary policy looks to be sterling negative. After all, sterling is traded as a growth currency.

Clearly, 31 October is going to be another massive day for UK financial markets as Sunak/Hunt present their fiscal fix. But backing the dollar as we do, we doubt needs to trade above 1.15 and retain sub 1.10 targets for later in the year. to trace out a 0.8650-0.8800 range for the time being.

Brazil Real: Over-rated

Many commentators seem to be backing Brazil at the moment, arguing that its asset markets have defied the sell-off seen in many developed markets this year. This is largely down to Brazil having hiked early and aggressively. The 12%+ implied yields available through the forwards are some of the highest in the world.

Through our FX talking publications, we have been taking a more negative view of the Brazilian real this year. Brazil took on a lot of debt through the crisis and the turn in the inflation cycle has largely been down to government intervention in energy prices ahead of the presidential elections. Here, Sunday sees the second-round run-off between Jair Bolsonaro and Luiz Inácio Lula da Silva. The latest polls point to a 54:46 lead for Lula. We think the prospect of a close and potentially disputed election result means that a greater risk premium should be priced into the real. We could see trading at 5.40/45 into Sunday’s election.

Those looking for high yields and better quality credit should look to the Mexican peso. 3m MXN implied yields through the forwards are close to 11%. The sovereign CDS of Mexico trades at 182bp versus 288bp for Brazil. And one month traded volatility stands at just 11% for versus 26% for Brazil – serving as a reminder of the risks in holding the real.

Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user’s means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

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