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.