ACM Update 07-02-22

Valentine’s day is around the corner. Is Sterling due to feel some love or will it be cast aside in favour of a EUR or Dollar suitor?

Written by: Liam Alexander
Date posted: 07-02-22

ACM Update 07-02-22

Valentine’s day is around the corner. Is Sterling due to feel some love or will it be cast aside in favour of a EUR or Dollar suitor?

As the major countries around the world start to accept Omicron, it’s not just the masks that are coming off. Central banks are starting to tighten and turn off the taps of ‘cheap money’; the Fed, BOE and ECB are setting the pace, with one eye on rampant inflation.

The Bank of England has hiked rates for a second consecutive meeting, but the members were divided between raising rates by 25bp or 50bp with the vote split 5-4. The pace of recovery is likely to be slow (understandably consumers were cautious in the run up to Christmas), but consumption seems pent up. The balancing act for most families, and the Bank of England, sits firmly with energy costs and non-discretionary inflation; household energy costs seem set to rise by 50% this year alone.

Back at Number 10, the PM had another difficult week with a critical report into the No 10 lockdown parties and five senior aides quitting. The case for no confidence is building. That will likely be a negative for GBP although some may argue drawing a line in the sand may support Sterling.

In the US, we had the release of the NFP figure (Non-Farm payroll) on Friday last week with a print of 467K against an estimate of 150K. The Dollar was given a lift on the back of this with the rebound continuing into Monday trading. We are trading around 1.35 the figure this morning.

You can view the recent movements in the graph below –

In addition, initial jobless claims declined to 238,000 from a revised 261,000 and came in below consensus. However, the economy decelerated going into Q1 ‘22 with both the Manufacturing and the Services ISM indices posting declines. The sharp increase in infection rates since December undoubtedly had a negative impact on those figures, a reversal in the coming weeks should have the opposite effect. There is a clear risk the sharp increase in prices and the negative impact on real income could significantly reduce GDP growth rates in Q1’22.

GBP/EUR

The major surprise in the Eurozone this week was the preliminary January CPI at 5.1% YoY up from 5.0% YoY, instead of falling to 4.6%, as was expected. Once again, the energy component surprised to the upside and pushed the headline index higher than expected. This obviously put more pressure on the ECB (European Central Bank), which also met last week and were more bullish on the potential for an interest rate rise this year following the BoE and the Fed likely to raise rates in March.

If you hold EUR and need to move back into GBP look to take advantage of the move lower from around 1.20 the figure. If you would like SPOT rates, please contact our dealing department and they will be able to provide you with rates of exchange.

You can view movements in the graph below in GBP/EUR –

If your feet are now firmly under the desk and you haven’t got a hedging strategy in place for Q2 feel free to reach out directly and we can discuss implementing a strategy that will mitigate your currency risk. The FX landscape with interest rates, inflation and cost of living being the main themes will shift yet again significantly this year.

Notable Economic releases for the week ahead:

Monday UK Halifax House Price Index; ECB President Lagarde speech

Tuesday UK BRIC Retail Sales Monitor; US Balance of Trade

Wednesday BOE Pill speech; US Fed Mester speech

Thursday US Inflation and jobless figures; BOE Gov Bailey speech

Friday UK GDP figures; US Michigan Consumer sentiment

If you have any questions, please feel free to reach out to me directly.

Have a great week