Closer to parity
Recovering from a tumble
The Pound has tumbled 10% lower versus the US Dollar this year, and the primary focus for Sterling this week is the Bank of England's interest rate decision, which could be key to the Pound's value in coming sessions. Markets are anticipating a 50 basis point interest rate hike from central bankers, which will be the most significant increase since 1995. The pressure is on BoE policymakers, with rising inflation and the European Central Bank and Federal Reserve making significant moves to increase interest rates and battle consumer prices. On the back of increased rate expectations, against a host of other majors, the Pound has risen by 1.50% since the start of last week. If policymakers take a more dovish stance and only hike by 25 basis points, the Pound could come under renewed pressure. UK manufacturing data has sunk to a 25-month low, and the threat of recession is shrouding UK data releases.
Meanwhile, in British politics, Rishi Sunak has vowed to make the most significant income tax cut in 30 years, adjusting tax from 20% to 16% by the end of the next parliament. Meanwhile, the stimulus Liz Truss is promising could see the BoE forced to hike interest rates above 3.0%. This week, UK construction stats and the BoE rate decision will take place on Thursday, and BoE Monetary Policy Committee member Huw Pill will speak on Friday. If Pill gives any guidance on the topic of interest rates, Sterling could experience some fluctuations.
One of the worst performers
The Euro hasn't had a good year, and to date, is one of the worst-performing currencies of 2022. Against the US Dollar, the Euro has been edging closer to parity, and Credit Suisse believes there's a 50% chance of a recession in the Eurozone by the end of the year. Meanwhile, JP Morgan has suggested EUR/USD could dip to $0.95% by the close of 2022. Issues looming over the Eurozone include energy supplies out of Russia and an Italian election in September. This week is a little quieter for Eurozone economic data, but Retail Sales stats will print, as well as German Industrial Production numbers, and the Eurozone Producer Price Index, which measures inflation from the perspective of producers.
Dollar backs off despite hikes
The Federal Reserve has been hiking interest rates aggressively, with a 75 basis point increase at its most recent meeting. However, the US Dollar has been faltering, as while the Fed hikes, it comes against a backdrop of weaker domestic data. Moreover, there's talk that the peak of Fed hawkishness when it comes to monetary policy, has passed. While many believe the Fed won't slow its current hiking cycle, it's possible that rate hikes could be smaller in future, perhaps around 50 basis points, as the US may enter a technical recession. In other news, markets will be watching OPEC+ announcements on oil production following US President Joe Biden's recent visit to Saudi Arabia--something which could also influence the Canadian Dollar. Meanwhile, in terms of data, the US Non-Farm Payrolls reading will likely be influential this week, as well as the ISM Manufacturing report. Federal Reserve members are also scheduled to speak throughout the week.
AUD and NZD
Inflation knocks expectations
Australian data released this morning has shown declines in the manufacturing sector, but the Aussie has remained relatively resilient in response ahead of this week's Reserve Bank of Australia rate decision meeting. However, the AUD exchange rate slipped last week following the publication of softer-than-expected inflation data. The market has been pricing in a 50 basis point interest hike this week, but the lower inflation reading may have knocked some expectations. The Pound fell by over 1% against the Aussie Dollar in July, with the pair down by around 7% so far this year, as the Reserve Bank of Australia maintains a positive interest rate differential against the Bank of England.
Meanwhile, the New Zealand Dollar has been struggling against the US Dollar, falling by 11% since the Reserve Bank of New Zealand began hiking interest rates in October last year. It could be that the New Zealand Dollar continues to soften, too, as it's failed to climb even after policymakers have delivered six consecutive interest rate hikes while suggesting more are on the horizon. However, it's a different story against the Pound—Sterling has fallen 2.6% against the Kiwi so far this year as the Reserve Bank of New Zealand remains out in front of the BoE with an interest rate of 2.50%. New Zealand labour market data will be released this week, which could influence the Kiwi Dollar's value.
GBP/CAD at nine-year low
The Pound to Canadian Dollar exchange rate has been trading around 9% lower since the turn of the year—a nine-year low. The fall has been encouraged partly by commodity prices remaining at record levels and the Bank of Canada acting more forcefully in its fight against inflation. This week, influential Canadian Balance of Trade data will make its way onto the market, along with highly significant Employment Change and Unemployment Rate stats--the latter is expected to increase slightly. Oil price and production news could also impact the Canadian Dollar in the week ahead as black gold is Canada's most lucrative commodity.