ACM Update 21-03-22
The word ‘transitory’ was often used next to inflation in Q4 ‘21. I haven’t heard it so often this year. Central Banks are all dealing with the same issues – bringing inflation expectations and inflation down. Couple that with lowering growth forecasts and how fast (or not) to raise interest rates and we’re going to be in for a year of uncertainty for the global economy.
From a UK perspective has the Bank of England cooled some of their language around interest rates? It seems so. From the last meeting further tightening “might be appropriate”. Interest rates were raised by the Bank of England with an 8-1 vote by 0.25% although some expected a 0.50% increase. Is there a downside risk to Sterling now from the slightly dovish tone? Perhaps. I would expect the Bank of England to take a ‘wait and see’ approach to see how rising prices weigh on consumer demand and how commodity prices feed into things. Commodity prices are largely outside the Banks control so they will need to see the lay of land and how second round effects of the Russia-Ukraine conflict impact things.
Indeed, the oil price is important for headline inflation. We’ve been close to 130 USD although we have since fallen back. How the oil price fares and how it correlates with inflation in the UK will largely be down to China being in/out of lockdown and their consumption. In addition, will the UK/US broker a deal with Saudi Arabia and other ME countries to increase oil production? Trying to forecast how things will play out geopolitically and economically this year is quite frankly futile. It changes day to day.
From a currency perspective, this year more than most, take a real look at your risk and your approach to risk. What is your strategy should GBP move 5-10%?
If you need to move into GBP from USD I would look to cover off some on a SPOT basis whilst implementing take profit orders to the downside should we see any sell off in Sterling or a strengthening Dollar in upcoming trade. If you would like to have a conversation with a member of the Aston team, feel free to reach out to me directly.
You can view the recent movements in the graph below –
Sterling/Euro
From a Sterling/Euro perspective we’re battling around 1.19 the figure. Upside remains capped for now although I would expect the EUR to weaken against the Dollar so that should drag GBP higher. If you hold EUR and need to move back into Sterling consider implementing a SPOT trade. If you would like a rate of exchange please reach out to your point of contact at Aston.
You can view the recent movements in the graph below –
The ECB have warned of inflationary pressures (shock). Will they raise rates this year? Once/twice? The War in Ukraine is going to have serious implications for the Eurozone and indeed pressure on EU GDP.
Out of the ugly parade this year I would expect the Euro to come last with the Dollar victorious and Sterling sitting in the middle. If you need to purchase EUR from GBP look at take profit orders around 1.19/1.20. Our dealing team can implement these for you.
This week we have the Chancellor, Rishi Sunak, and the Spring statement (mini budget). Fiscal tightening and how much will be the order of the day with a focus on the cost-of-living crisis. We thought UK PLC was going to be on the front foot post Covid although the Russia-Ukraine conflict has put any momentum in jeopardy. It is going to be a tough year for most.
Is this the calm before the storm? Whatever your circumstances from an FX perspective make sure you have a plan in place.
Enjoy the beginning of the warmer weather and if you have any questions, please let me know.
Have a fantastic week
