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.
GBP
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
EUR
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.
USD
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.