February 2022

Following the weekend’s events, the Russian Rouble has gone into freefall, and the flight to safe assets continues in the currency markets, with the dollar a primary beneficiary.

The markets have never seen such a large country cut out of the financial system, and the impact of such a bold move is yet to be fully understood. With geopolitics now wholly dominating the world’s financial markets, economic data will understandably be of secondary importance for the near future. However, markets will settle and take notice of the fundamentals at some point. With the impact of the war in Ukraine still unfolding, today’s view of the week ahead is a little shorter than usual as the likelihood is that there will unforeseen developments politically that are more likely to drive the direction of currencies in the coming days.

Last week the world received a jolt in the early hours of Thursday morning as Russia launched its invasion into Ukraine. The search for safe assets accelerated, and the usual suspects benefited with the dollar, the Japanese yen and the Swiss franc gaining ground. The euro, in particular, suffered, giving back most of its recent gains whilst sterling also fell to its lowest level against the dollar this year. Over the weekend, the West has toughened its stance and imposed strict sanctions on Russia, its key officials, and its high-profile oligarchs. Most Russian banks have been shut out of the SWIFT messaging system, making it nearly impossible to conduct international business and cutting Russia out of the global financial system.

GBP
With the flight to safe-haven assets continuing, sterling is likely to remain under pressure against the dollar in the days ahead. But with the war in Ukraine on Europe’s doorstep, the pound should continue to hold steady and probably appreciate against the euro. We have in prospect an unusually busy week from the talking heads of the Bank of England with all the members of its Monetary Policy Committee taking to the microphone over the next couple of days. Before last week’s events in Ukraine, the derivative markets were pricing in at least five more increases in the cost of borrowing this year. With energy prices now likely to spike even higher, it will be interesting to see how hard the Bank’s officials push back on this. Data wise, in common with the rest of the world, Markit will release its final takes on Manufacturing Purchasing Managers Indexes (PMI) tomorrow, Services  PMI on Thursday and Composite PMI on Friday.

EUR
Out of the major currencies, the euro remains the most vulnerable due to Europe’s proximity to the ongoing war in Ukraine. Data wise tomorrow, Germany releases its inflation figures, and Eurostat will release the preliminary inflation on Wednesday. Data for Europe. With oil and gas prices rising sharply, these figures are arguably already out of date. However, with the European Central Bank meeting next week, a high figure may put further pressure on its council members to tighten policy just when they don’t need it. Also released are the Purchasing Managers Indexes across the eurozone, and the minutes from the last ECB meeting are published on Thursday. Finally, we will be listening out for Ursula von der Leyen and the President of the ECB, Christine Lagarde, for words of guidance through this troubled time.

USD
Usually, the first week of the month is dominated by employment data culminating in the publication by the US Labour Depart of the Non-Farm Payroll data at the end of the week. With the Russian assault on Ukraine likely to continue through the week, they will now be of secondary importance to the testimony from Federal Reserve Chairman Jerome Powell when he faces the House and Senate banking committees on Wednesday and Thursday this week. With the US and its economy now in a very different place to where it was at the time of the Federal Reserve’s last meeting, he is likely to be more cautious and less hawkish than he was then. There is also a packed data docket starting tomorrow with ISM’s take on Manufacturing which they follow up on Thursday with Services. As we mentioned earlier, unemployment is the key data starting with ADP’s white-collar report on Wednesday, followed by the weekly jobless report on Thursday and finishing with Non-Farm Payrolls on Friday, which again are expected to show a good increase in employment.

The financial and currency markets were as wild last week as the weather was in the UK, and although the weather has slightly calmed this morning, it is unlikely that the markets will.

With Russia still threatening to invade Ukraine, the markets will remain on tenterhooks with sentiment as fragile as the peace is. As expected, the dollar, yen and Swiss franc were the primary beneficiaries as investors looked for a safe haven. The dollar did suffer some weakness as bond yields dropped as investors switched from riskier assets into them. Still, until, hopefully, a peaceful resolution is found, the dollar will stay well supported. Sterling also performed well last week after Employment, Inflation and Retail Sales data beat expectations. With the UK economy running hot, expectations are mounting for the Bank of England to take further action and raise the cost of borrowing at its next meeting. Sterling should remain underpinned by Base Rate rising again and indeed by another five increases in the coming year if the derivative markets are to be believed.

Worryingly the week ahead looks likely to follow a similar course to last week, with geopolitical headlines influencing the markets more than economic data. With this likelihood in mind, the euro could well stay under pressure due to its proximity to the dispute. The single currency is also not helped by the reluctance of any of the mouthpieces from the European Central Bank to grasp the nettle over the timing of their potential move to less accommodative policies. Last week speakers from the ECB dodged these hard questions, which is expected to continue for the foreseeable future. Away from geopolitics, it’s hard to see any economic data, apart from Consumer Expenditure in the US that is likely to shake the markets too vigorously. The only other data of note are the Markit Purchasing Managers Indexes published throughout the G10 on Tuesday and Wednesday.

GBP
As expected, after the strong sets of employment and inflation reports, UK retail sales bounced back strongly in January, as the influence of Omicron dissipated. These figures reinforced the idea that the UK economy had started the year strongly, convincing the markets that their aggressive pricing of tightening from the Bank of England is correct. Although it must be said that several respected analysts think that a base rate of nearly 2% by the end of the year is unlikely. The week ahead will be dominated by the state of play in Ukraine with very little consequence on the economic front scheduled for release, leaving sterling at the mercy of event some 1500 miles away. The pick of the bunch is Markit’s Purchasing Managers Indexes, expected to show a healthy bounce back, Indexes which are published as this note hits your inbox. Tomorrow Dave Ramsden from the Bank of England is scheduled to speak, and on Thursday, Andrew Bailey is due in front of a Treasury Select Committee at the Houses of Parliament.

EUR
The euro managed to hold relatively steady last week despite the crisis on the borders of Ukraine. With this situation ongoing and at present and looking unlikely to be resolved in the near future, investors are likely to remain exceedingly cautious of the euro. Indeed, if the possibility of a diplomatic solution recedes further or the Russians advance into Ukraine the single currency could see some fresh selling. With this in mind, this week’s economic releases are almost of secondary importance to the market. Still, we will watch out for signs of economic recovery from the Omicron variant in both the eurozone’s PMIs and Germany’s Ifo sentiment surveys. Also of interest will be the comments from Pablo Hernández De Cos, Luis Guindos and Isabel Schnabel from the European Central Bank. However, after last week’s failure to give any clues to the ECB’s thought process over possible changes to their economic policies, we won’t be holding our breath.

USD
Nearly all the movement in the currency markets were driven by geopolitics last week, and this week looks likely to be the same as a diplomatic solution to the problems in Ukraine is searched for. With this in mind, the dollar and other safe-haven currencies, the yen and Swiss franc would appear to have a limited downside. The data docket looks relatively bare with Markit PMI readings out tomorrow and fourth-quarter Gross Domestic Product, Initial Jobless Claims and the pick of the bunch Personal Consumption data on Friday. It’s another busy week for the Federal Reserve’s mouthpieces, with Raphael Bostic, Loretta Mester and Christopher Waller slated to speak, all of whom are generally hawkish. With the next Federal Reserve, Open Market Committee meeting fast approaching, the Fed speak will continue to be dissected for hints to whether the Fed is likely to front-load its rate hikes with a 0.5% move in March.

Scandinavia
The Swedish krona was rangebound throughout most of last week and was mostly affected by news coming out of Ukraine. The Riksbank’s decision to keep rates unchanged did not surprise anyone but the market did focus on Governor Ingves’ comments about future potential rate hikes. Today we will get the minutes from that very meeting and on Thursday the latest Unemployment figures are released. Despite the price of gas increasing the Norwegian Krone has had a lacklustre month so far and it weakened against the euro throughout last week. This week sees no important data releases.

Last week will go down as the week when central banks finally woke up to the threat of inflation and started to move to try and contain it.

The Bank of England was the first to follow on from the hawkish Federal Reserve and raised the cost of borrowing to .5%. Indeed, almost half the Monetary Policy Committee wanted to increase it further, so if things stay as they are, the odds are on a further move upwards in March. The Bank of England’s move was fully anticipated in the markets; however, sterling initially jumped on the thoughts of the further hike next month. The move upwards, particularly against the euro, was short-lived and reversed after Christine Lagarde grudgingly acknowledged that the ECB might also have to tighten policy. The change in tone from the ECB caught the market somewhat on the hop, and traders rushed to cover their short euro positions, causing sterling and the dollar to suffer setbacks.

The week of surprises had one trick left, which was revealed on Friday afternoon when the US Labour Department announced that Non-Farm Payrolls had increased by no less than 467,000. The market had been bracing for a much lower number, possibly a negative number after the White House strongly hinted as much. Unsurprisingly the dollar regained some lost ground and has opened this somewhat steadier. It was not only busy in the money and foreign exchange markets but also in the background the world’s stock markets continued to wobble as investors reassessed their risk appetite. Despite no central bank meetings being scheduled this week, no doubt there will be plenty of their members stepping up to the microphone to explain their actions further. Finally, the trials and tribulations of Boris Johnson look set to continue, with some commentators suggesting he may face a no-confidence vote in the coming days.

GBP
The pound again confounded many in the market when it finished the week lower against the euro than it had started despite the upward move in the base rate. As we said earlier, the Bank of England is looking likely to move rates higher again in March. This would typically lead to a sterling rallying; however, buried in the footnotes to last week’s Monetary Policy Committee meeting, the Bank states that it expected inflation to drop relatively quickly from its elevated levels. Some took this as meaning that the peak of interest rates will be somewhat lower than anticipated. UK gilts are also pointing in this direction and giving signals that we may well be heading for a recession. This week is a quiet week for data, with the only meaningful release being Gross Domestic Product (GDP) on Friday. As would be expected after the hit to the economy that Omicron delivered in December, the figure is forecast to have fallen by about half a per cent. Huw Pill, the Bank of England chief economist, speaks on Tuesday as Andrew Bailey on Thursday evening. With a dearth of data due, the focus may turn to Boris Johnson’s problems and the mounting tensions with Europe over the Northern Ireland Protocol.

EUR
After its best week of the year, we will be watching to see if the euro can consolidate its gains against sterling and the greenback. After Christine Lagarde and the ECB took a hawkish turn last week, it appears the period of policy divergence between them and their peers, the Bank of England and the Fed, maybe coming to a close. The week ahead sees a relatively calm data docket, with the German Consumer Price Index on Friday being the highlight. With Germany’s understandable obsession with inflation, a high number would place further pressure on the ECB and increase the anticipation of a tightening of policy by them sooner rather than later. Christine Lagarde has another opportunity to expand on her change of heart this afternoon when she gives a speech, as do Phillip Lane and Eric De Guindos on Thursday. Politically, Italy seems to have resolved its domestic issues with Sergio Mattarella re-elected whilst President Macron takes to the centre stage in an attempt to get President Putin to back down from invading Ukraine.

USD
At long last, after a period of denial Jerome Powell and the other governors of the Federal Reserve seem to be taking decisive action on inflation. This week focus will switch from inflation to the less thorny problem of employment with this month’s publication of Non-Farm payrolls on Friday. With Omicron still disrupting large swathes of the economy, expectations are for a low gain in employment of about 100,000. It must be remembered that there are about 10 million vacancies, and one month’s figures are unlikely to upset the chain of events to higher interest rates that Jerome Powell has started. The ISM Manufacturing Purchasing Managers Indexes are due out tomorrow, the ADP white-collar labour figures on Wednesday, the weekly jobless total, and the Markit Purchasing Managers Indexes on Thursday to digest. As usual, after a Federal Open Market Committee meeting, several governors of the Fed are expected to speak and air their views on inflation.

Scandinavia
The Swedish krona continued to weaken throughout last week and is now once again at levels last seen in 2020 against the euro and sterling. With no important data releases scheduled for this week but for the Services PMI, the krona will once again be left to the mercy of the markets with very little to defend itself. Tensions over Ukraine are expected to be the main influencer.
With gas prices soaring, the Norwegian krone has been able to stand its ground against most other G10 currencies. This week sees no data releases that are considered significant; however, we will watch the House Price Index release to see whether last year’s two rate hikes have managed to put a dent in the booming property market