New quarter fresh uncertainty

World Markets

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.