Exchange rates at crossroads, pound goes in red, dollar rises in price (Daily analysis 4.11.2022)

Central banks dominated the start of the month. Although on Thursday, the Bank of England, like the Fed the day before, raised rates by 75bp, the decision had the opposite effect. While the dollar rose in the early days of November, the pound recorded a marked discount. The currency market is still jittery and digesting the monetary authorities' decisions. The next major stimulus in the area will be today's US labour market report, which will be published at 1:30 p.m. (CET).

On Thursday, the market was digesting the Fed decision and getting used to the path of US interest rates leading above 5%.

Dollar: EUR/USD dives to 0.9750

The need to price in a more aggressive US monetary policy obviously benefits the USD. The euro/dollar exchange rate even retreated to the region of 0.9750. In a few days, the quotation became closer to the 20-year lows of September (0.9530) than to the recent peaks (1.01) before the markets' disappointing European Central Bank meeting at the end of October.

Today, the US employment report will be in the spotlight (publication at 1:30 p.m. CET), verifying the persistence of the overnight retreat from the USD. Forecasts assume that the world's largest economy added almost 200 000 jobs in October in the non-farm sector, with the unemployment rate rising from 3.5 to 3.6%. Wage growth, which is very important in terms of the sustainability of inflationary pressures, is expected to be less than 5% y/y for the first time this year. The dollar will only start to weaken noticeably and sustainably when signs of declining inflation and a weakening labour market start to emerge from the US economy. On the other hand, simply maintaining the Fed's determination to combat price pressures will probably not be enough for the dollar to reach new highs against the main currencies.

Pound: dovish hike pushes GBP/USD below 1.12

At the start of the month, the weakest of the main currencies is the pound. Once again, the Bank of England has had a hand in this, joining the Fed and ECB in raising interest rates by 75 basis points (to 3%) on Thursday. The sharpest hike since 1989, pushing the cost of money to its highest levels since November 2008, was not enough to support the GBP. Indeed, the Bank of England maintained its extremely pessimistic view of the outlook for the economy, which will not start growing until 2024.

Governor Andrew Bailey announced further increases to control inflation, which is set to reach an annual rate of around 11% this quarter, the highest in four decades. Meanwhile, the pound was plunged by the declaration that the overall scale of the tightening would be smaller than the market had anticipated. As a result, the GBP/USD pair, which had been at 1.1550 just after the Fed decision, collapsed below 1.12. It is not just the Bank of England's attitude and the economy's weakness that has us negative about the pound's prospects. After the political hoax starring Lizz Truss, investors may also be pricing in higher political risk.