FX Update: US incoming data in focus. Sterling pays price after dovish BoE.

Bank of England wrap. The BoE hiked by 75 bps to 3%, as most expected and as was mostly priced in, but Bailey and company strongly pushed back against expectations for the scale of future moves, saying that the terminal rate priced in currently by the markets would induce a two-year recession. There were also two dovish dissenters at the meeting, one calling for 50 bps rate hike and another for a mere 25 bps. New forecasts were also released, which gave a particularly grim outlook for the economy, looking for a GDP print of -0.5% QoQ in Q3 2022 vs -0.1% expected in September. The inflation forecast now shows a peak around 11% in Q4, which is marginally hotter than the prior meeting’s projection. Sterling was crushed lower, having already fallen heading into the meeting, and it speaks volumes that even though the BoE pushed back against the forward implied expectations for further tightening, which it said would trigger a 2-year UK recession, the market did not budge those expectations. In short: the market refuses to acknowledge what the BoE thinks it might do, probably figuring that the BoE will have no choice due to sterling weakness but to pursue the path to 4.50% or higher rates before mid-next year. I was surprised by the lack of discussion or journalist questioning in the press conference around the risk that currency weakness drives worse inflationary outcomes if the BoE fails to do as much as the market is pricing. Sterling remains in a heap of trouble.

Table: FX Board of G10 and CNH trend evolution and strength.
The USD needs to stick the move off the back of the FOMC meeting after the US jobs data today, otherwise we’ll suddenly be back to square one. The hottest movement in FX was clearly the sterling sell-off yesterday on a very clearly dovish Bank of England meeting. CNH is making waves on a lot of movement overnight and noise (unconfirmed) of an eventual opening up.

Table: FX Board Trend Scoreboard for individual pairs.
While the US dollar flipped to a positive trend in many places, we must still consider the risk that incoming data complicates the plot. GBP is already registering a negative trend in many new GBP pairs after yesterday’s BoE meeting. Interesting that the NOK failed to roll over to the downside in a couple of key pairs after the small hike from the Norges Bank yesterday.

Upcoming Economic Calendar Highlights

• 1215 – UK Bank of England Chief Economist Huw Pill to speak
• 1230 – US Oct. Nonfarm Payrolls Change
• 1230 – US Oct. Unemployment Rate
• 1230 – US Oct. Average Hourly Earnings
• 1230 - Canada Oct. Unemployment Change/Rate
• 1400 – Canada Oct. Ivey PMI
• 1400 – US Fed’s Collins (Voter 2022) to speak