USD started the week in a relatively weak position, with its G7 rivals looking to capitalise. The Fed, however, will likely be very pleased with how the USD has managed to retain its position and hold off Sterling’s recent push towards 1.25. PMI Tuesday was supposed to be the real talking point of the week, but in reality, its impact on the markets was minimal. Generally, it has been an extremely stagnant week in the Currency markets. In fact, following the US’s surprisingly good GDP figures yesterday (showing growth of 2.9%) actually saw the USD claw back recent gains made by GBP and EUR.

All attention now turns to next week, where the interest rate decisions will take centre stage. The US have their decision on the 1st with the Eurozone and the UK’s decision coming the following day. This is probably the most highly anticipated set of interest rate decisions since inflation has spiralled out of control following the Covid 19 outbreak. Now that it is relatively accepted that Central Banks have seen peak inflation, it is now highly expected that they will revert back to 25bp hikes. The only exception to this seems to be the UK; with inflation still above 10%, it appears that a 50bp hike may still be necessary. I have a feeling that the BoE will opt for a 25bp hike based on the fact that they have been generally dovish in the past. With little else out next week (except a few key speakers which, based on recent trends, could swing the rates more than the decisions themselves.), it could be seen as a missed opportunity for the GBP, with the US pretty much nailed on to go for 25bp, and Sterling would likely see considerable gains with a 50bp hike.

It’s a balancing act at the moment, with economies feeling the strain of the recent interest rate hikes but inflation remaining well above the 2% target. How central banks juggle this will be scrutinised closely. A man who could find himself under extreme pressure will be Andrew Bailey. He was highly criticised for his approach, with many believing he was too slow to implement economic tightening and is partly to blame for the reason why the UK has suffered the highest inflation compared to the Eurozone and the US. In his most recent speeches, he has taken a much more dovish approach, which indicates he believes we will soon stop hiking rates, stating that he believes 4.5% will be the terminal rate. This, however, is controversial because there are still no clear indicators that inflation really has reached a point where the economy is ready for such measures. Should this prove to be wrong, he could see himself becoming subject to heavy criticism, similar to the criticism he faced at the start of the pandemic for being too slow on the uptake of higher interest rates.