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FX Insights 03 Nov 2023: Analysis, Economic, FX and Currency Forecasts

November 1, 2023 - Written by Tim Boyer

Regularly updated with the week's most important commentary on the FX markets, central bank moves, and macroeconomic data:

BoE Analysis, Pound Sterling - Lloyds Bank 03/11:

Lloyds Bank notes a 6-3 MPC vote to maintain rates at 5.25%, with GDP growth forecasts reduced and concerns over inflation, but Barclays Research anticipates another hold in December.

"The MPC voted 6-3 in favour of holding rates at 5.25% (Mann, Haskel and Greene voting for a 25bp hike) at the Bank of England meeting yesterday. They revised down GDP growth in every year of the forecast, and painted a worse picture of the supply side labour market dynamics. The net effect is a higher path for inflation but still ending below target. The MPC also kept their existing forward guidance that monetary policy would need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably. They also retained the upside optionality to conduct further tightening if there were more evidence of persistent inflationary pressures. Barclays Research believes this leaves the most likely outcome for December as another hold."

AUD/USD, RBA Preview - Chris Weston, Pepperstone Group Limited 03/11:

Chris Weston expects the AUDUSD to drop 50 pips if the RBA holds rates with a hawkish bias, but anticipates a 30-40 pip spike if a 25bp hike is announced.

"Trading the RBA meeting - Given market expectations and pricing, should the RBA leave rates on hold but retain a hawkish bias, then we should see the AUDUSD drop 50 pips or so off the bat, with a solid rally likely seen in the AUS200. With the base case being we see a 25bp hike while maintaining a tightening bias, then all things being equal the AUD should find good buyers, with AUDUSD spiking 30-40 pips."

BoE Analysis, Pound Sterling - ING bank 02/11:

ING believes the Bank of England has hinted at resisting market predictions of 2024 rate cuts, but foresees a rate decrease by next summer.

"The Bank of England may have kept rates on hold, but we're seeing the first signs of pushback against financial markets which are starting to price in rate cuts for 2024. We think investors are right to be thinking that way and we expect the first cut over summer next year."

BoE Preview, Pound Sterling - Lloyds Bank 02/11:

Lloyds Bank anticipates the BoE will maintain rates at 5.25%, expecting a likely 6 to 3 split decision, with interest in future policy clues.

"The Bank of England today seems set to leave interest rates unchanged at 5.25% for a second successive meeting [...] Recent lack of comments from some BoE policymakers makes it difficult to fully gauge what individual members all now think. Nevertheless, another split decision seems likely, albeit a change in membership of the Committee (Sarah Breeden replaces Jon Cunliffe as Deputy Governor for Financial Stability) may mean that this is now 6 to 3. There will also be interest on any guidance the BoE gives on the prospect of future policy moves, particularly any indication of how long Bank Rate will remain at its current level. Its formal guidance will probably be largely unchanged: on the one hand referencing the broader slowdown in near-term activity while, on the other, pointing to the risk of persistent high wage growth and inflation to emphasise the need for rates to remain ‘higher for longer’. But its forecasts may provide some new clues on the rate outlook."

GBP, Pound Sterling forecast, BoE Preview - Barclays 02/11:

Barclays Research anticipates a three-way split vote at the BoE, maintaining a 5.25% Bank Rate, with forward guidance suggesting prolonged high rates, while forecasting a rate cut totalling 100bp in H2 2024.

"Barclays Research expect the BoE to keep the Bank Rate at 5.25% with a three-way split vote. The base case for the split vote is 1-6-2, reflecting the finely balanced nature of the decision and plausible arguments on both sides (Dhingra to vote for cut and Mann and Haskel to vote for hike). Forward guidance will likely continue to stress rates remaining high for a prolonged period with the MPR forecasting lower near-term GDP growth, a similar path for inflation and reduced skew. Beyond November, they expect the Bank Rate to be on hold until August 2024, before cutting by a cumulative 100bp in 25bp increments through H2 2024, but there are risks on both sides."

EUR/USD, US Dollar, FED Analysis - James Knightley, Chief International Economist at ING 02/11:

ING notes that Wednesday's dovish Fed announcement led to lower Treasury yields, but the EUR-USD swap rate suggests limited dollar correction.

"Markets perceived today’s Fed announcement and press conference as moderately dovish, and the drop in Treasury yields would – in theory – point to a softer dollar. The 2-year EUR-USD swap rate differential is around 8bp tighter than pre-meeting, but remains considerably wide at -128bp. As shown in the chart below, such a differential is consistent with EUR/USD trading around 1.05-1.06 and, despite the acknowledgement that financial conditions have tightened, there weren’t enough dovish elements to trigger a material dollar correction."

Euro Rates - Anders Svendsen, Chief Analyst at Nordea 1/11:

Nordea believes rate cuts are prematurely priced and anticipates the first rate cut by summer, suggesting front-end steepeners as effective hedges.

"Our view is unchanged at this point. Rate cuts are priced too early. Yesterday's inflation data confirmed that service price inflation is sticky. We see the first rate cut around summer and from that point, the risk is that rate cuts will be faster than what is currently priced. Having said that, we think higher rates is where the pain is and given how much is priced in, front-end steepeners even beyond the next couple of meetings make for good hedges with high roll."

Pound Sterling forecast, BoE Preview - Joann Spadigam, European Rates Strategist at Natwest 01/11:

Natwest anticipates the BoE to maintain the 5.25% rate due to moderating data and geopolitical events, foreseeing potential Sterling downside if rates remain unchanged.

"We expect the BoE to keep rates on hold at 5.25%. We think a hike is very unlikely, which is reflected in market pricing. Data since the September meeting has shown a moderation in wage inflation, a possible mild contraction in Q3 and weakness in high- frequency survey data. Recent geopolitical events may induce some caution and further reinforce the decision to keep rates on hold. We expect the BoE to caution against expectations of early rate cuts. Given market pricing for a modest chance of a hike, we see downside risks for Sterling if Bank Rate is left unchanged as we expect."

US Dollar, EUR/USD - Lloyds Bank 01/11:

Lloyds Bank notes US bond yields and the dollar rising on strong data, while Eurozone reports weakened the euro.

"US bond yields rose yesterday after the release of stronger-than-expected wage data. In contrast, UK and German bond yields were down. The US dollar is modestly higher particularly against a generally lower euro, which slipped after weaker than expected Eurozone GDP and inflation reports."

FED preview - Daniel Bergvall, Head of Economic Forecasting at SEB 01/11:

SEB thinks the Fed won't rule out more hikes due to strong data but anticipates rate cuts beginning Q2 2024.

"We believe that it is too early for the Fed to completely close the door to more interest rate hikes, given the strong data, but that the focus will now be even more on how long the policy rate will remain at its current level. We are sticking to our forecast that the September hike was the last and that the Fed will start cutting rates in the second quarter of 2024."

AUD/USD - Chris Weston, Pepperstone Group Limited 01/11:

Chris Weston highlights potential USD strength impacting the 0.6288 support, anticipates range trading, and points to upcoming key events like the FOMC meeting and RBA's expected rate hike.

"On the daily, we see strong support into 0.6288, which may be tested again soon if the USD strength continues, and we don’t see a sharp turnaround in Chinese/HK equity markets. A closing break of 0.6288 would suggest the October lows would be revisited. Counter to that scenario, we can see a falling wedge pattern, portrayed by a series of lower highs, and compression in the price action that suggests a move is coming. The double bottom neckline sits at 0.6452, but that would take a break of the trend resistance and as it stands price action is hardly suggestive of an explosive upside move – at present, range trading is the preferred strategy. As a short-term driver, today’s FOMC meeting could promote a USD move, although isn’t expected to offer any significantly new intel, and we get the NFP report on Friday. The RBA are, on balance, expected to hike next week."

FED Preview, USD/JPY - ING 01/11

ING anticipates a temporary Fed pause and possible short-lived dollar correction, while predicting further rise in USD/JPY despite Japanese intervention efforts.

"We expect the Fed to pause today, in line with expectations. There is a mild risk of a dollar correction, but that should be short-lived. Japanese authorities are stepping up efforts to contain unwanted volatility in rates and FX, but we suspect markets will keep pushing USD/JPY higher and into the new intervention level"

FED Preview, US Dollar outlook - Barclays 01/11:

Barclays' analysts expect the FOMC to keep rates steady, hint at tightening, and foresee a December hike, followed by potential rate cuts in late 2024 based on economic conditions.

"Barclays Research expect the FOMC to leave policy rates unchanged today, despite a very strong acceleration in activity in Q3 and a strengthening of the labour market, as they take time to assess the effect of the increase in longer-term yields. They think the FOMC will maintain a tightening bias in its statement, and will ultimately hike rates 25bp in December. The view long term is for the Fed to remain on hold through September 2024 with rate cuts over the final three meetings of 2024, conditional on the economy slowing well below potential growth and inflation clearly returning toward the FOMC's target. If the economy doesn't slow as projected, they would expect a higher policy rate path"

FED Preview - Derek Halpenny, Head of Research at MUFG 01/11:

MUFG expects a hawkish tone from Powell, given the US's strong fundamentals, and sees potential for higher yields and a strengthening US dollar.

"We would certainly expect a clearer hawkish tone from Powell than what we got from Lagarde last week. The fundamental backdrop in the US is much stronger (although we expect it to weaken soon enough) and that will likely incentivise Powell to err more on the hawkish side. Powell needs more hard evidence of slowdown before discounting the chance of more rate hikes. With a December FOMC hike priced at just a 25% probability there is scope for yields to move higher this evening. With US dollar momentum more positive again after yesterday’s rebound, we could see this extend further from here."

USD/CNY, Chinese Yuan - Jeffrey Zhang, EM Strategist at Credit Agricole 01/11:

Credit Agricole warn of PBoC actions on USD/CNY and expects a near-term upside bias in 10Y CGB yield with monetary easing curbing further increases

"For FX, the focus remains on whether the PBoC will change the behaviour of the USD/CNY fixing or take stronger steps to curb any climb further in USD/CNY. For rates, 10Y CGB yield will likely stay in a tight range, with upside bias in the near term awaiting the start of additional CGB issuance in November, while expectations of more monetary easing measures would help to curb the upper room."

USD/JPY, BoJ - Ry utaro Kono, Chief Economist, Japan at Credit Agricole 31/10:

Credit Agricole forecasts an earlier BoJ rate hike and potential exit from NIRP and YCC by March, with possible forward guidance changes in December.

"We now think an earlier rate hike from the BoJ is more likely given today’s YCC decision and the change in its inflation outlook. We now look for the BoJ to revise its forward guidance in January and exit from its NIRP and YCC in March. We are also mindful of a scenario in w hich the yen weakens further and the BoJ feels compelled to respond by rew ording forw ard guidance in December ahead of a potential January exit from both NIRP and YCC."

AUD/USD, USD - Howard Du, CFA, G10 FX Strategist at B of A Securities 30/10:

BofA foresees a continued bullish USD trend against AUD, NZD, and SEK, suggesting fading the recent AUD/USD rally due to upcoming macro risks, despite AUD's current undervaluation.

"In addition to the bullish USD signal from CARS, positioning analysis also continues to favor the USD vs AUD, NZD, and SEK (Exhibit 5). Up/down vol and residual skew indicators show the USD uptrend is likely to continue its course vs these G10 currencies. The AUD has had a decent rally over the past week on increased market pricing for the RBA (Reserve Bank of Australia) to resume rate hikes (Our signals also liked higher AUD/NZD last week, see Antipodean spikes, 23 October 2023). But now AUD/USD faces 50d SMA resistance. With a slew of macro event risks (Treasury refunding, FOMC, geopolitical conflicts) for this coming week, we prefer to fade last week’s AUD/USD rally near the 50d SMA. Despite AUD valuation looking cheap, our fundamental strategist also prefers to hold a neutral AUD/USD view until year-end (World at a Glance: 25 October 2023). The risk would be a more-dovish-than-expected FOMC meeting leading to a broad-based USD selloff."

FED Preview - CitiFX 30/10:

Citi expects no immediate Fed rate change but believes signals on future hikes are crucial; hikes are priced for Dec and Jan with cuts anticipated from March.

"No change is expected in Fed Funds rate, but signaling on future hikes, if they are still on the table, will be essential to markets. Hike odds are still priced for Dec and Jan and rate cuts are expected from Match."

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