The dollar continues to climb

Central Banks and their policy choices once again dominated the currency markets last week and will continue to do so as we edge closer to their next meetings.

With interest rates set to rise worldwide, speculation is rife on the quantum of the rises. The most aggressive stance is still being taken by the US Federal Reserve, which continues to say nothing to dissuade investors from anticipating successive increases of 0.5% at their next two meetings and, if some analysts are to be believed, possibly by more. The derivative markets are now pricing in no less than nine back-to-back rises of at least 0.25%. In contrast, the Bank of England is sounding almost dovish, and in the face of gathering problems for the UK economy, this may be prudent. Last but by no means least, even the European Central Bank is now hoping to raise rates by 0.75% by the end of the summer.

The euro initially bounced before giving back most of its gains on the news that Emmanuel Macron was comfortably re-elected on Sunday after gaining nearly 58% of the vote in the Presidential Election. With the French Presidential elections settled, a European embargo on Russian oil is more likely, which will cap any advance by the single currency. The week head is bereft of important economic data until the end of the week when inflation in the eurozone and GDP in the US is released. With a dearth of financial data, speculation over the war in Ukraine will play a more significant role in the markets, and the euro will be on the frontline as it feels the impact of slowing economies, dropping consumer confidence, and rising energy costs. Also fighting for attention will be the bond markets which, after a week of rising yields, may continue to undermine confidence in the equity markets, which could lead to a further search for safe-haven assets. All in all, a challenging week ahead for the euro and the pound was possibly made worse with month-end volatility exaggerating movements.

Friday’s poor set of retail sales data combined with falling consumer confidence was taken badly by currency traders who pushed sterling sharply lower against the euro and the dollar. It has started the week still on the back foot, having lost nearly two cents over the last seven days and is now sitting near its lowest levels against the dollar for 18 months. On reflection, the hesitancy of Andrew Bailey to be hawkish is understandable; however, the market still sees at least a 0.25% rise in base rate after next week’s meeting of the Bank of England’s Monetary Policy Committee. Whether the appetite is still there to increase the base rate by 0.5% is now open to debate, and this doubt has encouraged the recent sellers. Sterling’s sharp fall will also put pressure on the Bank of England as there is now a danger of importing inflation through a weakened exchange rate. Unusually it’s a barren week for macroeconomic data in the UK, which may not be necessarily a good thing. Attention may turn to Boris Johnson’s problems and his seemingly constant battle to stay as Prime Minister. Campaigning for the local elections, which take place on the same day as the Bank of England meets, will also start to hit the headlines, so we could be in for a nervy week politically, which may feed through to sterling. Tomorrow Sam Woods from the Bank of England is scheduled to speak, and his colleague Sarah Breeden will take to the rostrum on Thursday.

Despite President Macron winning a second term, the euro is still hovering around its lowest level for two years against the dollar. With the Federal Reserve set on raising the cost of borrowing next week and risk aversion continuing, the euro is likely to stay on the back foot for the time being. This week, investors in the euro can turn their attention back to raw macroeconomic data and the problems the European Central Bank faces. The problem for the ECB is how to start normalising policy and when to start doing so. This was brought into focus on Friday with ISMs Purchasing Manager’s Indexes release. During April, the services sector in the eurozone touched a seven-month high; however, manufacturing PMIs appear to be grinding to a halt. With manufacturing stuttering and inflation growing, it does appear that the eurozone is heading into a period of stagflation. The eurozone has the busiest data docket of all the major currencies this week, starting this morning with the release of the IFO Business sentiment reports for Germany, followed by EU Construction Output. We then have a couple of days without top tier data before Germany releases its preliminary Consumer Price Index and Eurostat publishes a plethora of data, the most important being Consumer and Industrial Confidence. A busy week closes with  German and eurozone GDP and the EU Consumer Price Index. The only speakers due from the European Central Bank are Fabio Panetta this evening and Luis de Guindos on Thursday afternoon.

The Federal Reserve looks nailed on to raise rates in a little over a week, by 0.5% and even if some are to be believed, 0.75%. This should continue to support the dollar, especially against currencies with more circumspect central banks. The prospect of the rise is causing risk assets to come under pressure in particular stock markets, which in turn is strengthening the greenback. A quiet start to the week on the data front is in prospect until Thursday when Gross Domestic Product is released, which is expected to have slowed from the last quarter as Omicron damaged the economy. However, if recent data is believed, this is a blip, and the second quarter GDP should bounce back strongly. Friday sees the release of Personal Consumption Income and Spending, including the April Index, which the Fed will be watching closely. Before that, Durable Goods are released tomorrow, and of course, the weekly jobs data is out on Thursday. There are no speakers from the Federal Reserve this week as they are in their normal blackout period ahead of their monthly meeting on 4th May.

Inflation and ECB set to hog the limelight

It was a tale of two central banks last week and the market’s reactions to the minutes from their previous meetings.

First up, last Wednesday was the Federal Reserve, and the general hawkishness of their minutes was as expected; if anything, they lent more credence to the prospect of successive 0.5% upward moves in their base lending rates after their next meetings in May and June. The minutes also seemingly paved the way for a relatively rapid unwinding of the asset purchases that they have been making since the start of the pandemic, a further tightening of policy. The European Central Bank didn’t disappoint economic commentators either, as their minutes confirmed just a slightly hawkish tilt amongst a still split council. Aside from the central bank speak, the ongoing war in Ukraine and its impact on energy and commodity prices continued to cast its dark shadow on the markets.

The periods on either side of the Easter Bank Holiday are often some of the quietest weeks of the year as traders take advantage of school holidays and spring weather to go on vacation. This year, the week ahead looks a little different, with politics domestically in France and geopolitically looking to hog the headlines. Yesterday’s French Presidential elections left President Macron facing Marine Le Pen in the runoff vote in two weeks. Speculation will now increase whether Marine Le Pen can mount a better campaign than in 2017 between now and the second-round vote on April the 24th. Major economic data releases are also scheduled, including inflation data from the UK and the US later in the week. In Europe, the European Central Bank meets on Thursday for what is sure to be a challenging meeting in light of the ongoing war in Ukraine.

Sterling continued its recent slide against the dollar last week and has opened this morning just above its lowest levels since November 2020. Unusually for a Monday, there was a plethora of data released, including Gross Domestic Product, which was as expected at 9.5%. At the same time, Manufacturing and Industrial Production data was also released, both of which missed their estimated levels. With the Bank of England seemingly starting to back peddle on rate rises, GBPUSD is likely to slip more. However, against the still beleaguered euro, it advanced strongly last week and is trading back near the top of its recent range. A busy week for data continues tomorrow with the Unemployment and wage figures for March. Analysts expect another positive set of figures and will pay particular attention to wages to see if they are climbing at a rate that will intensify pressure on the Bank of England to raise rates. The jobless total is followed on Wednesday by the most critical data for the week, the Consumer Price Index for March, which is forecast to have risen again to 6.7%. Released simultaneously are the Retail and Producer Price Indexes, which, taken with the CPI, will give investors a complete picture of UK inflation. After these releases, it will become more apparent how aggressive the Bank of England is likely to be with interest rate rises which will, in turn, give direction to sterling

Emmanuel Macron is now the favourite to be re-elected as President of France after the first round of the Presidential elections last weekend. He is projected to have won 28% of the votes, with Marine Le Pen lagging some way behind in second place on 24%. The runoff vote on April the 24th will be a repeat of the one in 2017 when Macron won comfortably. The key to victory possibly lies in the hands of supporters of the Marxist Jean-Luc Mélenchon, who was in third place with around 20% of the first-round votes, and who they decide to endorse. The euro may breathe a sigh of relief in the early part of the week ahead of Thursday’s European Central Bank meeting, the first since the war in Ukraine started to impact their economies. With inflation continuing to roar upwards and possibly worsening if an energy embargo on Russia is introduced, the ECB faces some tough decisions. Last month, as the recent minutes testified, there was a slight hawkish pivot from council members. The question is will the hawks continue in their ascendency over the doves on the council as the prospect of stagflation becomes more likely? Whatever the outcome of the internal wrangling, Christine Lagarde will face a challenging press conference following the meeting when markets will expect more clarity on the future policies of the ECB. Apart from the ECB meeting, the only data scheduled for release is tomorrow’s German Consumer Price Index and the ZEW’s Economic Sentiment surveys.

The dollar had a strong week last week and breached 100 on the dollar Index for the first time in two years. Its strength came after the publication of the Federal Reserve’s minutes from its most recent meeting. It was also pushed higher as several of its spokespeople called for sharply higher rates. Unusually the US is likely to take more of a back seat this week unless the war in Ukraine intensifies. However, the US bond market always has the ability to grab the headlines, and after its recent turbulence, it would surprise no one if it again dominated proceedings. Despite bond yields briefly inverting last week, seen as a harbinger of recession, the most significant impact on the dollar will be the absolute level of yields and whether they continue to climb. The all-important Consumer Price Index, released tomorrow, is expected to reach an eye-watering annual rate of 8.6%, the highest since December 1981, as sanctions on Russia start to impact.

New quarter fresh uncertainty

As we enter a new quarter, the week ahead is relatively quiet on data releases, the only items likely to impact the markets are the minutes from the last Federal Open Market Committee and European Central Bank meetings.

The minutes from the FOMC are likely to confirm their hawkishness and fear of inflation. Bond markets will be interested to see how committed the Fed is to raising rates. Participants in the markets will be watching to see if last week’s inversion of short term against long term yields, indicating a substantial likelihood of a recession in the next 18 months, was an aberration. With such a light calendar, attention will turn back to the situation in Ukraine, and perhaps a more realistic and less optimistic view of events will emerge.

The first quarter of the year ended last week with Geopolitical concerns on the back burner as markets turned their attention to book squaring last Thursday and US employment data on Friday. The dollar unusually faced some selling pressure as international investors rebalanced their portfolios, slipping on Thursday before roaring back on the first day of the new month. Sterling continued to bounce around in a relatively tight range of about two cents against both the dollar and the euro. With the situation in Ukraine barely changing despite the talks, markets turned their attention to the prospect of interest rate rises, particularly in the US, where consecutive .5% hikes are forecast. The likelihood of such aggressive rate rises was reinforced on Friday when wages in the US showed strong growth, and a solid employment number was released.


As we mentioned at the beginning of this note, sterling is stuck in a relatively narrow range against its peers, the euro and the dollar. As witnessed last week, it is moving up and down in tandem with changes in global risk sentiment. There is, of course, a tendency to try and second guess the Bank of England on Interest rate policy. In speeches last week, BoE policymakers were cautious, almost dovish, over the prospect of rises in the cost of borrowing. This week is unlikely to be different, and we do have BoE Governor Andrew Bailey and Catherine Mann and Sir Jon Cunliffe all speaking this morning, who may give the market some thoughts to digest. Understandably the major influence on sterling will be the ongoing situation in Ukraine, and we all hope that good news starts to come from there. Apart from Central Bank speakers, the only major release of interest are Markit’s Manufacturing Purchasing Managers (PMI) Indexes tomorrow. After a busy start to the week, the only other speaker scheduled from the Bank of England is Huw Pill on Thursday


Similar to sterling, the euro has been trading in a relatively narrow range, and any gains that it made as a result of book squaring were quickly given back to the market on Friday. The single currency still remains vulnerable, especially to the dollar, as there appears to be no narrowing of the policy divergence between the central Banks. Of course, the eurozone is also dependent on Russia for energy supplies and, as such, at the mercy of the whims of Vladimir Putin, which will continue to pressure the single currency. With inflation, as elsewhere, starting to gather pace, the European Central Bank’s recent attitude will be studied when the minutes from its last meeting are released on Thursday. This week should see the first-round French Presidential elections on 10th April start to influence proceedings. With recent opinion polls showing Marine Le Pen gaining ground, the election of Emmanuel Macron may not now be a totally foregone conclusion. As always with markets, any uncertainty tends to unsettle, and a potential change of French leadership would certainly worry investors in the euro.   This morning Sentix will release its Investor Confidence Index for the eurozone, and tomorrow, Markit’s Indexes for Manufacturing are scheduled. Wednesday has the last significant figure of the week when eurozone Retail Sales for March are published. Wednesday is also a busy day for European Central Bank members, with Luis De Guindos, Fabio Panetta and Phillip Lane speaking.


With a quiet week on the data docket ahead, the situation in Ukraine will return to the forefront of traders’ minds, and with little prospect of peace in the foreseeable future, the dollar should remain to be the primary beneficiary. Indeed, after the awful discoveries in Bucha, hostilities, both economically and on the ground, are likely to increase. After bouncing back on Friday from last week’s quarter-end induced selling pressure, the dollar should continue to climb, especially after Friday’s employment data all but confirmed at least one if not two .5% interest rate rises at the May and June meetings of the Federal Reserve. Traders and investors will be searching the minutes from the last FOMC meeting for further clues as to how aggressive in raising interest rates they are likely to be. The only other data that may impact are the Markit and  ISM PMI tomorrow, the weekly jobless total on Thursday and Consumer Credit on Thursday. The only speaker scheduled this week is Lael Brainard tomorrow afternoon.