ACM Update 21-03-23
Over the past week price action in currencies has been largely driven by financial instability and heightened systemic and contagion risk. In the US, First Republic Bank shares tumbled a further 46% on Monday, despite a $30 billion rescue deal last week. In Europe, the UBS rescue deal for Credit Suisse is still being chewed over with the bond market looking for price stability around additional tier one (AT1) bonds. Investors are now looking for higher returns to take on the debt. European regulators will need to provide further calm and assurance to the markets over the coming days and this will likely help drive direction on EUR/USD. Of course, there are numerous other events this week that will contribute to currency movements. As Dorothy in the Wizard of Oz would say, “We’re not in Kansas anymore”.
You can view the price movements in the past week in the graph below –
Cable (GBPUSD) hit its highest level since February around the 1.2285 mark in recent trade although a modest Dollar bounce has put paid to any further upside, for now. We have the Fed meeting tomorrow. Will the Fed soften its hawkish stance? They have a tough decision to make on whether to keep raising rates to cool inflation or whether to take a breather with potentially more turmoil and fallout from the banking sector to come. Before the SVB (Silicon Valley Bank) implosion it was expected that Fed policymakers would raise by potentially 50bps. This is now off the table. For me, it’ll be a 25bp hike rather than rates being kept on hold as they will want to demonstrate a continued fight to bring inflation down whilst an acknowledgement that they are keenly aware of the financial sector risk. Later this year I would see rates being cut.
In addition to the Fed, we have the BoE (Bank of England) meeting this week. At the last meeting on February 1st, the MPC (Monetary Policy Committee) voted by a majority of 7-2 to increase Bank Rate by 50bps to 4%. What will the outcome of this week’s meeting be? It’s a coin toss (if anyone still has any coins). Will there be a further rate rise, or will they be kept on hold? I think we’ll have a 25bp hike by the Bank of England rather than a 50bp hike expected a little over a month or so ago. It provides a balance between financial stability and bringing inflation lower. However, as this week has shown us, a lot can change, and very quickly indeed.
Apparently, the answer to life, the universe and everything is 42. If we could get an answer to the direction on Sterling that would be more helpful for everyone. If you hold USD and need to move into GBP, consider implementing some take profit orders. There will likely be heightened volatility around the Federal reserve and the Bank of England event so speak with one of the Aston team to discuss technical levels to place orders at. If you would like one of the team to contact you, please let me know directly.
If you are on the other side and hold GBP, consider looking at some SPOT transactions ahead of these events whilst allowing a percentage of your exposure to be placed into orders to capture any upside that may materialise. If you would like to discuss your specific requirements in detail with one of the team, please let me know.
You can view the recent movements in GBPEUR in the graph below –
The ECB President, Christine Lagarde, will be working overtime this week and will hopefully get paid time and a half. An intervention from the ECB and Lagarde helped stem losses in Bank stocks and the Euro yesterday with a dig at the SNB on the rules that Europe play by is different to the Swiss authorities it seems. I would expect Central Bankers to be front and centre this week with the Fed and BoE the main events. Data releases will take a back seat. However, we do have some releases that are important to note. We have UK inflation data in the form of CPI (YoY) (Feb) released tomorrow with a print of 9.8% expected against a previous of 10.1% and European PMI data released on Friday. However, all eyes are on the Central Banks this week.
If you have requirements around the Euro and would like to discuss your individual situation with one of the team, feel free to reach out to your point of contact at Aston.
Have a fantastic week