The spotlight switches across the Atlantic for part of this week with both the European Central Bank and the Bank of England both meeting, with the Old Lady expected to move the base rate up to 0.5%.
As last week started, it gave a hint to the world of the volatility in store as investors realised that the days of cheap and easy money in the US were well and truly ending. With stock markets moving in ways that they have rarely done in the last forty years, risk sentiment took a turn for the worse, and as it did, the dollar became even more attractive. The worst fears of many investors became a reality when the Chairman of the Federal Reserve appeared after their monthly meeting and gave an uber hawkish press conference. He didn’t actually commit to any immediate moves but made it patently clear that controlling inflation was now their uppermost priority. With analysts predicting anything from 3 to 7 moves up in interest rates this year, it was no wonder that the dollar gained ground in particular against the euro. Incidentally, this would be their first back-to-back move since June 2004.
After their meetings, both on Thursday, the US Labour Department will release its monthly Non-Farm Payroll report, often a market-moving event. Unusually, there is also great political drama that could cause even greater market mayhem. With Russia still massing troops on the border with Ukraine, the euro will remain pressured, especially with the threat to its gas supplies from Russia. In the UK, Boris Johnson faces another problematic week as he waits, as the rest of parliament does, for the publication of the Sue Gray report into “partygate”. All in all, another exciting week in prospect.
| GBP Sterling in common with most, if not all, G10 currencies suffered at the hands of King dollar last week. However, it was not all doom and gloom as it regained almost all of its recent losses against the euro. And this morning, it is back knocking on the door of its best levels since Brexit against the single currency. Attention will turn to Threadneedle week at lunchtime on Thursday when Bank of England Governor Andrew Bailey will announce the decisions of the Monetary Policy Committee and the rationale behind them. With the threat of Omicron receding and society opening up, the UK looks like it’s returning to normal. Unfortunately, the flip side of the recovery has been the jump in inflation to levels last seen in the 1980s. Unemployment, which the Bank had been concerned about, is looking under control, giving the bank comfort for any hike in the base rate. As we said earlier, it is now widely expected that the base rate will be increased to .5%, which the money markets are predicting will be the first of several moves this year before it peaks at just below an unlikely 1.5%. The Bank may also adjust its Quantitative easing policy and possibly allude to reversing it with quantitative tightening as it changes its view on inflation and wages.EUR The euro was under the cosh again last week as the policy divergence between the European Central Bank and its main rivals was laid bare by the hawkish statements of Fed Chairman Jerome Powell. This week could be a big week for the euro with the publication of the 4th Quarter’s Gross Domestic Product later this morning and Inflation data before the European Central Bank meets on Thursday. With the eurozone still way behind the UK and US, no great shocks are expected from the ECB. Indeed, the most interesting part will be the language that its president Christine Lagarde chooses to use in her press conference after the meeting. Although inflation isn’t rising as sharply in the eurozone as it is elsewhere, that’s not to say that there is not a growing issue causing a divide in the council. Her challenge will be to talk tough on inflation to appease the hawks whilst reassuring the doves on the council that nothing dramatic is planned. Whilst the ECB finds itself in this fix, the single currency’s problems are likely to mount against those currencies that are already tightening policy. Indeed, some expect the single currency to test its lowest levels against the dollar and sterling.
|