Market Update

The ECB surprised markets last week by raising interest rates by 25bps to record highs instead of keeping them on hold as initially expected- the bank now will pause on rate hikes for now and keep an eye on data- it seems the ECB believes that growth will be slow in the Eurozone but inflation could still creep up into next year, Though the ECB had hiked rates, the Euro ended up weakening into the end of the week, and this was due to most analysts and traders now looking to price in when the ECB will look to do their first rate cut, with some banks predicting as early as next April- this is realistic if we see the European economy shrink further- and could potentially be a trend amongst most economies- as most economies slow down, it will be more difficult for consumers to deal with higher prices and higher lending costs.

This week- the BoE will be meeting to potentially raise interest rates again, currently the expectation is that we see a 25 bps hike, alongside a signal from Governor Bailey that the BoE hiking cycle has peaked and that future rate hikes will be unlikely, so it is possible we get the same result as the ECB last week, if the BoE signals it is pausing for now- then potentially markets will begin looking at rate cuts- the Pound has been an outperformer this year, but this will stop alongside rate hikes stopping. If you are trading Sterling this week, I would remain cautious of Thursday and what the BoE meeting could mean for GBP through the next quarter.

Aside from the BoE meeting we do have some important releases through the week, the first is European inflation data out on Tuesday where we are expecting inflation to fall to 5.3% (Down 0.2%) which will be encouraging considering the latest hike from the ECB, this could help with stalling the current drop in EURUSD prices.

On Wednesday we have UK inflation data where we are also expecting a slight drop from 6.9% down to 6.8%- unfortunately, this isn’t a big enough drop to warrant not hiking on Thursday so I do not expect to see the market move much on this data unless it comes out dramatically higher or lower than expected. On Wednesday evening we have the FOMC interest rate decision, where the Fed is currently expected to keep rates on hold at 5.5%- given current data there doesn’t seem to be a reason for them to hike again, however with the ECB and BoE hiking, the Fed could also do a surprise hike as well- so I would be cautious on Wednesday if trading the U.S Dollar.

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