ACM Update 21-02-22

Storm Eunice and now Storm Franklin has created some havoc in the UK. Will GBP resemble the O2 arena this week or will it continue to push higher against the Dollar and Euro?

Covid restrictions in England are expected to be lifted – potentially this week. What will that do for Sterling? It should help to get UK PLC out of second gear and build momentum going into Q2. If you are holding Sterling, consider taking advantage of some of the recent gains on Cable (Sterling/Dollar) by locking in a SPOT deal with a member of our dealing team. We were trading under 1.35 and have now pushed higher above 1.36 the figure.

UK unemployment figures came in at 4.1% last week with a print that came in on expectations. UK CPI (inflation data) came in at 5.5% and was slightly stronger than consensus estimates. Will Sterling outperform the Dollar in Q2? How many rate rises will there be in the US? Where will UK interest rates end up this year? Now the argument of last year that inflation may be transitory has gone when do we expect inflation to ‘normalise’ both in the UK and US? The recovery from the Covid pandemic rather than Covid itself is now what markets are focusing on.

You can view the recent movements in Sterling/Dollar in the graph below:

Geopolitical tensions remain high and is the dominant factor driving sentiment at present. US and Russian officials have planned a meeting that may help lead to the de-escalation of the potential conflict with Ukraine. Any potential de-escalation from an investors point of view may lead to a move away from safe haven currencies so we could see a slight dollar sell off this week.

The other main market driver this year is the Federal Reserve. In all likelihood the Federal Reserve will be raising rates in March, according to FOMC member Brainard. An expectation of a 0.25% move is largely built in. Some are calling for a 50bps hike although those calls are lessening with an expectation for a steady steam of 25bps hike. Some Banks are calling for 7 and potentially 9 hikes this year. The days of low rates are at an end it seems. Quantitative tightening rather than easing will also now be on the agenda and the risks that may not be priced in around that.

Sterling/Euro

In terms of Sterling/Euro we have danced with 1.20 the figure on numerous occasions although we haven’t seen a sustained break above this level. We are flirting with it again this morning (on the back of better than expected preliminary PMI figures) although I expect the game of tennis and rallies to continue with Sterling over 1.20 then back under 1.20 and back over this week.

You can view last weeks movements in Sterling/Euro in the graph below:

If you hold GBP and need to purchase consider locking in some of the recent gains. I expect GBP/EUR to trend higher in the remainder of Q1 with the usual dips along the way. If you have requirements please do speak with a member of the Aston team and they will be able to help you shape a strategy that allows you to take advantage of opportunities whilst catering for downside risk. If you would like a member of the dealing team to reach out to you please let me know directly.

On Wednesday we have the BoE Monetary Policy Report Hearings although other than that from a UK data perspective we are relatively light.

From a European perspective the ECB’s inflationary problems aren’t as great as the Fed’s or the BoE’s. According to the ECB. The ECB president, Christine Lagarde, suggests high inflation is likely to remain in the near-term. When supply chain issues subside the economy in the medium-term should hit the 2% inflation goal with a normalisation of policies. The market consensus is for a rate hike towards the end of 2022, and for an end to QE by Q3 or Q4.

The global economy is shifting away from quantitative easing to quantitative tightening. Expect continued rate rises to fight increasing inflation.

Data this week

• Monday – China, PBoC Interest Rate Decision/UK, Markit Services PMI (Feb), expected at 55.2, previously 54.1
• Wednesday – UK, BoE Monetary Policy Report Hearings
• Thursday – US, GDP Annualized (Q4), expected at 7.0%, previously 6.9%
• Friday – US, Durable Goods Orders (Jan), expected at 0.6%, previously -0.7%

The world seems an increasingly complicated place with new and varied challenges affecting economies. The phrase ‘new normal’ used to be said. I don’t think there is a consensus anymore on what ‘normal’ is. That provides opportunities and risk and from an FX perspective it makes the landscape ever more challenging to navigate in 2022.

If you would like to schedule a call with a member of the team to discuss your specific requirements please let me know.

Have a fantastic week