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EUR up against GBP ahead of key ECB interest rate announcement

Good morning

It has been a horrendous time for GBP. Yesterday we saw GBPUSD trade below the March 2020 lows to reach 1.1405, the lowest level since 1985. Thatcher was in power back then, giving Truss at least something in common with our ex-PM. GBPEUR has slumped to 1.1505, that is over 150 pips lower than just a couple of days ago. GBPUSD has managed to regain 1.1500 but is making no headway against EUR. GBP did make some ground against JPY overnight, rallying to 166.25 which goes some way to show how weak the yen is, but even this couldn’t be sustained and we are back down to low 165s.

Fed officials speaking yesterday sounded particularly hawkish, Brainard said it will take many months of data to confirm inflation is falling, Fed must continue to act in the meantime although she did note that a stronger USD itself will help to cool inflation and that there will at some point become a risk of raising rates too much. We’re not there yet. Feds Mester said she sees rates above 4% in early 2023. Goldmans have changed their Fed rate forecast, now seeing 75bps rise in Sept and 50bps in Nov, up from 50 and 25bps previously. All this supports USD

Meanwhile the ECB will announce their latest rate rise this afternoon. There has been a lot of talk over whether we will see a 50 or 75bpse rise, market forecasts seem to be bang in the middle of the two, although EUR strength against GBP and its smaller recovery to parity against USD suggests perhaps that the greater risk is for the larger move. This would be more in keeping with other central banks recently.

BoC did raise rates 75bps to 3.25% and made it clear they would continue with their fight against inflation, they fear inflation is becoming more entrenched and will be assessing how high rates need to go. This hawkish edge has seen USDCAD trade down from around 1.3200 to almost 1.3100, not a huge move but any currency that fares well against USD at the moment is doing a pretty decent job. There is however a feeling that BoC are nearing the end of their rate rise cycle and could top out at 3.75% after a 50bps rise in October.

RBAs Lowe spoke overnight who made it clear that as rates went higher the case for a slower pace of increase becomes stronger. AUD lost ground against USD as result, trading from 0.6750 to 0.6715 although it has since recovered. AUDNZD still around 1.1150, where it has been for much of the week, after a small blip lower post-Lowe, while GBPAUD is still up in mid-1.70s,

Gold has bounced off that support area I mentioned and has pushed up to over $1720 this morning. This is quite a big area, having tested and failed a couple of times here since end August. This 1680-1725 range won’t last forever. Stops are reported on the upside from shorts, although those shorts seem to be feeling more comfortable at the moment than their long counterparts.

I’ve read some warnings of possible food shortages, with some producers in the EU closing operations due to high energy prices, something I have to say should be prevented at all costs even if it needs government intervention. In addition, Putin has threatened to abandon the recent grain deal. I have to say I have a lot of sympathy for farmers, however unless I am mistaken I am sure many were give money by EU to not produce anything over the past few years. I know that we cannot conjure up crops immediately but maybe we need to go back to producing food of our own. I am sure I am over-simplifying things and missing some key points but farmers may have to actually get back to farming.

We don’t have a huge calendar today but what there is could make life very interesting, with several central bank speakers as well as the ECB rate announcement. Just have to sit here watching the screens and find more downside GBPUSD structures. Its pouring with rain outside, I do have half an eye on the speed with which my grass is turning green and growing, it certainly needs a mow. Perhaps I should replace my lawn with crops.

- 13.15 ECB rate announcement

- 13.30 US initial jobless claims

- 13.45 ECB press conference

- 14.10 Feds Powell speaks

- 15.15 ECBs Lagarde speaks

- 16.25 BoCs Rogers speaks

- 02.30 China CPI

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