ACM Update 11-04-22
A mixed set of fortunes for GBP last week against the Euro and Dollar. In the three-horse race, the Dollar is definitely a nose ahead of sterling in terms of current strength, whilst the Euro is still a bit confused as to exactly where the course is going frankly…
Starting off with the Dollar, we saw a strong week last week. Moves were mainly driven by the minutes from the latest Federal Reserve meeting which demonstrated an appetite for bigger interest rate hikes to come, and fast from some members.
Two leading members of the Fed (Bostic & Evans) indicated last week that they were open to getting interest hikes moving along, but at a moderate pace. This however is in contrast to the stance of a third Fed member, James Bullard. He has a rate path in mind to bring policy back to a more “neutral” position, but this would mean 50 basis point rate rises at every remaining meeting this year. There is a fine line at present between aggression and moderation, so the next Fed meeting on 4th May, will be very insightful.
For now, GBP-USD dipped down to its lowest levels since November 2020, with a brief visit under 1.30. Movements for the week on the pair are shown below:
On the UK side of the equation, a lot of the headlines consisted of stories about cabinet members last week. Boris Johnson was spotted in Kyiv meeting with Volodymyr Zelenskyy, agreeing financial and military aid for the war-torn country. Meanwhile at home, Chancellor Rishi Sunak made the news with regards to his wife’s tax status.
Whilst both were significant, UK markets are more looking ahead to the raft of UK data ahead this week, squashed into four days before the Easter weekend. More to come on that.
The Eurozone had the majority of the major events last week though. To use a final Grand National pun, the ECB really do still have the blinkers on it seems as to current events and monetary policy. The central bank’s Chief Economist Philip Lane still believes that inflation will peak mid-way through this year, despite the current trajectory. Inflation forecasts from the major central banks have been a long way off the mark in the last 12 months, so Lane might well be optimistic to put it mildly.
With the ECB having been incredibly non-committal as towards its ongoing monetary policy, Danske Bank last week revised its own forecast for interest hikes during 2022 from Frankfurt. Expectations are now for Lagarde & co to introduce their first rate rise in September this year, followed by another in December. With the current approach, they might still be dithering by then!
Overall the pound had a better week versus the Euro, poking back above 1.20 at times as shown in the chart below:
In terms of political headlines though, the biggest was the first round of the French elections taking place yesterday (Sunday). In a repeat of the 2017 election, the current President Emmanuel Macron will take on the nationalist-populist leader Marine Le Pen in the runoff on 24th April. Early indications suggest Macron edged the first round on circa 28% to Le Pen on 23%. The run-off in 2017 saw 66% in Macron’s favour against the same opponent, but his popularity has dwindled of late, meaning the result could be very close. Two weeks of busy campaigning ahead.
Meanwhile, in Australia we are finally edging towards the first interest rate rise since….. wait for it, November 2010. Economic conditions (and inflation) are on the rise in Oz, leading to subtle changes in language from Philip Lowe which have sent expectations into a frenzy. The 137 months without an interest rate hike could well be over at the start of May.
Mon – UK Industrial Production (7am UK time)
Tue – UK Unemployment Data (7am), US Inflation (1:30pm)
Wed – UK Inflation (7am), Canada Interest Rate Announcement (3pm)
Thu – ECB interest rate announcement (12:45pm) & Press Conference (1:30pm)
Friday – BANK HOLIDAY for GOOD FRIDAY
With the risk of sounding like a broken record, the main talking points this week will be focussed around inflation and interest rates.
UK unemployment on Tuesday is expected to continue to fall to 3.8%, which would take us back to the pre-pandemic norm of March 2020. Undoubtedly a positive sign. This will be followed later in the day by US inflation, which as with recent months is likely to be eye-wateringly high.
Speaking of which, UK inflation lands at 7am on Wednesday morning with expectations of 6.7% (up from 6.2% the previous month. Upsettingly, I should point out that this number is for March, before the recent energy price cap rise, but will include the fuel price rises as a result of the war in Ukraine. The April figure could be well over 7%, when that lands in early May.
Interest rate announcements in Canada (Weds PM) and the ECB (Thurs PM) follow. Bank of Canada are expected to be moving to half per cent interest rate hikes at their next few meetings to cool inflation, whereas the ECB are still sat on their hands for now. The subsequent press conference is likely to be more useful.
Sterling remains well-poised with little variation versus the Euro, seeing us very much rangebound between 1.1850 to 1.2050 of late. Against the Dollar, we are faced with an excellent opportunity for Dollar sellers with prices close to 1.30. Reach out to the team if you have any upcoming requirements to sell Dollars for either sterling or Euros.
A brief note that the Aston offices will be CLOSED for the Good Friday and Easter Monday bank holidays in the UK over the coming weekend, and we wish all our clients a Happy Easter break.
Have a great week and enjoy the Easter break if you have the time off.