In our FX review this week, we run through the implications of another high inflation reading from the UK, along with hawkish comments from US Fed chair Powell.

A quiet week with two outliers

Markets were a lot quieter this week after the past couple. The lack of central bank meetings, and somewhat of a lull with the war in Ukraine, saw participants get a chance to catch their breath.

Even though major crosses struggled to make any real moves, two currencies of note did catch attention. AUD was a top performer, with AUDUSD breaking above 0.7500 for the first time in six months. Higher iron ore prices are continuing to provide wind in the sails of the currency.

JPY was the other outlier, but for the wrong reasons. USDJPY vaulted above 120, and then managed to take out resistance from 2016 at 121.65, to close the week just above 122. We think the pair is overdone in the short term, and so have gone short looking for a retracement back to 120 this week.

UK inflation continues to head higher

Aside from the main movers, the market had to digest more fundamental drivers. For example, on Wednesday we got the latest UK inflation reading. It came in at 6.2%, beating expectations of 5.9% and the previous month reading of 5.5%.

GBP didn’t really lift following this number, as the Bank of England last week made it clear that only modest further tightening of policy (ie rate hikes) could be needed this year. Normally, such inflation beats would see GBP rally, as the expectation is for the central bank to then raise rates to stem it.

We think that the BoE has underestimated inflation, and so are happy to be long GBP in coming months as the market prices in more hikes than currently.

Fed chatter is hawkish

US Fed chair Powell also spoke on Wednesday, along with other Fed speakers later in the week including Waller, Bostic and Evans. The broad tone from all of them was that the Fed are happy to do what is necessary with future hikes. 50bps increments were spoken about openly, with this causing us to believe that next meeting will see a 50bps interest rate increase.

However, as we flagged last week, the USD is already very strong, given the situation in Ukraine. Therefore, we struggle to see much more upside, and think there are better risk/reward trades out there.

Our current preferences are short USDJPY and long GBPCHF.

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