In our FX review this week, we run through the key data releases for GBP that make a rate hike next month no done deal, along with how the equity and crypto selloff is translating into FX markets.

Is a rate hike guaranteed by the BoE next month?

Last week we had several key data releases that were likely watched closely by the Bank of England (BoE) ahead of their upcoming meeting in early February. 

First up was the ILO unemployment rate on Tuesday. It beat expectations at 4.2% by coming in at 4.1%. This marks a continued tightening in the labour market, with the rate falling for much of the past 12 months. Below 4.5% is seen in our view as a point where excessive tightness creeps in, therefore this figure leads us to support a rate hike in February.

Next up was inflation for December, released on Wednesday. It was a rocket-fuel figure of 5.4%. Arguably this is the most important data point that the central bank will be watching. We’ve now been above the 2% target inflation level for several months, which should really suggest more action is coming on monetary policy.

However, the only spanner thrown in the work was retail sales figures on Friday. Month-on-month sales dropped by 3.7%, a far cry from modestly negative expectations of -0.6%. Although we can debate reasoning behind this figure for hours, we think this means that a rate hike next month isn’t guaranteed, but is still strongly likely. 

What does this mean for GBP? We think most of the hike is currently priced in at current levels. Therefore, we won’t be chasing it higher in the next couple of weeks. Any positions we take will likely be after the meeting.

Cross-asset dump to end the week

The trickle lower in equity, fixed income and crypto markets during the week really took off on Thursday and Friday. We noted the bloodbath in the NASDAQ, which now is down well over 10% on the month. Bitcoin also suffered, with it trading at $35k as we write, down almost $10k on the week.

The movements in FX were more muted. USDJPY and USDCHF moved lower, with USDJPY closing a 113.64. For an upcoming tactical trade idea, we do like a long USDJPY position, but will wait and see how the new week starts before getting on this. 

Commodity currencies suffered, but again without much of bang. For example, AUDUSD closed the week at 0.7170, so still firmly in the trading range of 0.71-0.73 that we’ve seen recently. This is likely due to the strength seen this year on some key commodities. For example, CAD has remained firm thanks to rising oil prices.

Looking ahead, eyes will be on the Fed meeting this coming Wednesday. The market is still heavy long USD, so the bar is high to avoid disappointment.

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