A holiday-shortened week

The week ahead is disrupted by holidays, with the US closed today for Memorial Day and the UK closed on Thursday and Friday to celebrate the Queen’s Platinum Jubilee.

There are also half-term school holidays in the UK which tends to diminish liquidity, and month-end tomorrow, which should, when combined, add to volatility. Despite the holiday interrupted week, there is plenty to occupy the markets starting this morning with Germany’s Inflation data, followed on Wednesday with the S&P Purchasing Managers Indexes. However, the key data will be released at the back end of the week with the release of the US employment data. As we are becoming accustomed to domestic politics in the UK will continue to dominate the headlines with Boris Johnson looking increasingly vulnerable.

Last week saw the dollar continue to fall for the second week running, following six consecutive weeks of gains. The primary beneficiary was the euro which gained nearly two euro cents over the last seven days. The euro was supported by the increasingly hawkish noises coming from council members of the European Central Bank, who have been talking more frequently about the possibility of a rise in euro interest rates in the summer. There is some scepticism over whether they will be as hawkish as they sound, but we will see in the fullness of time. Still, with the first sounds of hesitation from the US policymakers at the Federal Reserve being heard, it is, for the time being, enough to underpin the single currency. Sterling mainly benefitted from the dollar’s weakness, finishing better on the week whilst trading sideways against the euro to end broadly unchanged.

As we said previously, with a holiday-shortened week ahead due to the celebrations in the UK for the Queen’s Platinum Jubilee and many traders off to share school half terms with their children, sterling could be in for a relatively quiet time. Sterling ended the week strongly as traders digested Rishi Sunak’s financial statement and calculated the effects of his generosity. It gained ground, particularly on the dollar and has opened this week in a suitable celebratory mood ahead of the week’s festivities. The conclusion seems to be that the giveaways won’t add materially to the inflation outlook in the UK and may actually give the Bank of England a little more room to manoeuvre and move interest rates upwards. Having suffered from fears that the Bank was becoming dovish, sterling recouped some of its losses and enters the new week looking a bit more composed. There is a dearth of economic data this week, with the only noteworthy release being S&P’s final take on May’s Purchasing Managers Index for the Manufacturing sector on Wednesday. The only spokesperson from the Bank of England scheduled to speak this week is Andrew Hauser on Wednesday.

The euro had a good week gaining on both the dollar and sterling as council members of the European Central Bank revealed their hawkish tendencies just as the Federal Reserve started to float the idea of a pause in their proposed interest rate hikes in September. Whether the ECB actually follow through on their proposed hike, only time will tell, but in the meantime, it was enough to encourage some short-covering and, latterly, some fresh buying of the single currency. With holidays and month-end distorting the market, it will be hard to judge the conviction of this new buying, but at least the council members of the ECB who had been worried by the low level of the euro will now be in a happier place. In contrast to the UK, the eurozone has a busy calendar of data starting this morning with reports on Business, Economic and Consumer Confidence for the bloc and German Inflation. Tomorrow Germany reports its unemployment level whilst the first readings of May’s Consumer Price Index for the eurozone are released by Eurostat. On Wednesday, Markit releases its Purchasing Managers Index for the EU and Eurostat its Unemployment level. Finally, on Friday, Markit will publish its final take on May’s Purchasing Managers Indexes alongside Retail Sales for the EU. Christine Lagarde has an opportunity to air her newfound hawkish credentials when she delivers a speech on Wednesday, and whether Fabio Panetta and Phillip Lane are also converted may become apparent as they also speak in the afternoon.

The US markets are closed today for Memorial Day, but after a strong close from the stock markets and a reassessment of risk, the dollar could come under renewed selling pressure. The inflation data released on Friday did indeed show a softening and possible plateauing of the rise in prices feeding into the narrative that the Federal Reserve may well take time out from hiking rates after their next two rises. This week as always, in the first week of the month, the US Labor Department will publish their full employment report on Friday, which is expected to continue to be good, with the major restraint being worker supply, with nearly two vacancies for each job. With a limited workforce chasing jobs, the upward wage pressure is likely to continue with its associated inflationary impact. Before they are published, ADP releases their private-sector employment report on Wednesday, and on Thursday, the weekly jobless total is posted. Consumer Confidence for May will be published tomorrow, and as elsewhere, Purchasing Managers Indexes are scheduled for release on Wednesday and Friday. There are plenty of policymakers from the Fed speaking this week, and the markets will be listening to see if more talk of a late-summer pause in hiking rates is mentioned. The Fedspeak starts this afternoon with Christopher Waller, followed by John Williams and James Bullard on Wednesday. Thursday, soon to be appointed, Lorie Logan and Loretta Mester step up to the microphone, and Lael Brainard speaks on Friday.

Finally, we hope all our readers enjoy the week’s festivities and will join us in raising a glass of something bubbly to Her Majesty Queen Elizabeth II on the wonderful occasion of her Diamond Jubilee! God Save the Queen!

Can the pound sustain its rally?

The markets finally woke up to the fact that the Federal Reserve will no longer bail the stock markets out with easy money after Jerome Powell’s speech last Tuesday.

Having constantly warned participants that the Federal Reserve was serious about rapidly increasing the cost of borrowing, the penny finally dropped, and Wall Street led the rest of the world’s stock markets sharply lower. The falls initially had the impact of pushing the dollar higher, but by the end of the week, the money leaving riskier assets sought the safe haven of US bonds and yields eased. As yields eased and fears of a recession grew, the dollar pulled back. Sterling had an eventful week with what some saw as an MOT of financial data for the UK economy published. The figures revealed that the jobless rate is at its lowest level for nearly 50  years; however, wages are rising to add to fears of an income spiral that will fuel already high inflation. Price rises were a smidgen easier than forecast whilst consumer confidence was much lower. At least the great UK shopper is doing their bit, helping Retail Sales be more robust than expected!

This week the UK has a well-deserved rest from being the centre of attention for economic data, but the pound may well stay at the forefront of traders’ minds. After a good bounce last week, the momentum has continued this morning. However, Boris Johnson is not entirely out of the woods over partygate despite avoiding the embarrassment of a further fixed penalty notice for Covid lockdown breeches. The long-awaited Sue Gray report will be published this week and may embarrass him and the government further. The ongoing problems with the Northern Ireland Protocol are also starting to worry the markets, and with a trade war threatened, sterling may begin to lose some of its newfound shine. The key events in the coming days look to be centred around US data and the minutes from the last Federal Reserve meeting. With volatility still at heightened levels, it seems sure to be yet another week where we witness larger and more unpredictable currency movement than usual.

GBP: A wild week for sterling ended with it rallying strongly, which it has continued to do this morning. It is now over three cents better against the dollar and nearly a cent better against the euro than a week ago. With the economic data released last week pointing toward a period of stagflation and potential political upheavals in the background, it is somewhat surprising that sterling has performed so well. It may be explained by traders and investors being overly short of the pound, as was evidenced by figures released for the derivative markets last Monday. The statistics revealed that traders such as hedge funds were unusually four times shorter of sterling than they were long. The only significant data releases are the preliminary Purchasing Managers Indexes for Manufacturing and Services tomorrow morning. The services element will be the most closely studied, with consumer confidence collapsing as the cost-of-living crisis takes hold.

EUR: Last week, the euro dragged itself off the floor after more hawkish than expected minutes from the last European Central Bank meeting were published. The single currency was also helped higher by statements from ECB council members, the most noteworthy comments coming over the weekend from Christine Lagarde, who said the first rise in rates for over ten years might come in July. Earlier in the week, Klaas Knot had said that a .5% rise was not out of the question, although that still seems unlikely. During the week ahead, there will be plenty of opportunities for policymakers from the ECB to air their views starting tomorrow with Christine Lagarde again. On Wednesday, Fabio Panetta, Klaas Knott and Phillip Lane are all slated to take the microphone. This week is relatively light on the data front, the highlight being the Purchasing Manager’s (PMI) reports on Tuesday. Last month’s figures beat expectations, especially in the services sector. With consumers worldwide pulling their belts in the Service PMI will be watched closely to see whether the same is happening in the EU as Summer approaches. Much of Europe celebrates Ascension Day on Thursday, a public holiday, most notably in France and Germany. This morning as this note lands in your inbox Ifo will release its surveys on German business conditions, which are expected to have worsened slightly over the last month.

USD: Just as it looked impregnable, the mighty dollar backed down last week as fears over an impending recession took hold in the US. Wall Street and the stock markets finally realised that the Federal Reserve will not come to investors’ rescue until inflation is out of the system. As the attractions of holding riskier assets, such as shares, waned, the appeal of government bonds increased, forcing yields lower, making the dollar less attractive. This week, the only significant data releases for the G3 currencies are in the US. The data week starts tomorrow with preliminary Purchasing Managers Indexes and New Home Sales released. Durable Goods orders are scheduled for Wednesday, First Quarter Gross Domestic Product (second estimate), and the weekly jobs data are on Thursday. On Friday, the Federal Reserve’s favoured measure of inflation, the Personal Income and Spending report, including the core Personal Consumer Expenditure deflator, is published. Also scheduled are the minutes from the last FOMC meeting, which will almost certainly confirm the prospect of two .5% rate increases at the June and July meetings. There are plenty of speakers from the Fed who are expected to carry on with their hawkish rhetoric starting this afternoon with Raphael Bostic; tomorrow, it’s Jerome Powell’s turn, and on Friday, possibly the most prominent hawk at the Fed, James Bullard.

An uncomfortable week ahead for sterling

Another dramatic week in the financial markets came to a close with both sterling and the euro off their worst levels against the dollar but still sharply lower than they had started the week.

As is so often the case, there was not one trigger to the selling pressure but more a combination of decreasing risk appetite and, in sterling’s case, poor economic data and fears over inflation. Sterling has endured a torrid time over the last four weeks and is now nearly ten cents lower than it was trading in mid-April. It is not only sterling that has suffered; indeed, the Dollar Index is trading at twenty-year highs reflecting the general nervousness in the world’s markets. Much of the fear emanates from the US and is reflected in the moves on Wall Street. The Federal Reserve reaffirmed its commitment to less accommodative policies last week, with interest rate rises and quantitative tightening to come. With easy money drying up, the deleveraging of risk assets continued and will do so for some time.

Sterling is in a tricky position with an almost textbook combination of factors conspiring against it. The UK’s Gross Domestic Product figure, released last Thursday, showed sluggish growth and is possibly as good as it’s going to get. With poor GDP combined with high inflation, a hesitant central bank and domestic political problems, it is no wonder that sterling has been on a slippery slope. The week ahead could see more problems for the UK and sterling with a raft of economic data released on Tuesday and Thursday reporting on inflation and employment. Away from the UK, it looks relatively quiet week on the data front. Still, after Friday’s disappointing data in the US showed consumer confidence deteriorating, the Retail Sales figures also released on Tuesday will be studied more closely than usual. Unfortunately, it looks like another volatile week ahead, so buckle up and hang on to your hats!

GBP: As we said earlier, Sterling has been under the cosh against King Dollar, but it has just about held its own against the euro. Whether it can maintain this strength against the single currency will be sorely tested with the UK’s inflation and employment data due. The first data reports are scheduled for tomorrow morning when unemployment data is released. Usually, a drop in unemployment is a positive for sterling, but against a tight labour market pushing wages higher, this is not the case at the moment. The jobs data is followed on Wednesday by inflation data which is expected to show no let-up in its rise and is forecast to touch 9% in this week’s figures. A figure of this magnitude will give the Bank of England a headache as they have made it clear they don’t wish to tighten aggressively. The financial markets disagree, and according to the weekend press, so do politicians. This afternoon four members from the Bank of England’s Monetary Policy Committee, including Andrew Bailey, will face a grilling from the Treasury Select committee. The answers they provide may set the tone for sterling’s week. Retail sales are also released this week on Friday, which are likely to add to the gloom surrounding the pound. Also of concern will be the machinations playing out in the background politically between the EU and the UK over the Northern Ireland protocol. Still, it is hard to ascertain how many threats are just sabre-rattling.

EUR: The euro is trading near the bottom of its recent range and bouncing around its lowest levels since 2017, with analysts including JP Morgan, HSBC and Royal Bank of Canada forecasting that it will touch parity against the greenback. Indeed, data from the currency options market, collated by Bloomberg, now assign a 60% chance of parity being hit within the next year. The euro is still suffering from the policy divergence between the European Central Bank and the Federal Reserve despite policymakers’ repeated suggestions to raise rates in the eurozone in the summer. It’s an interesting week ahead for data. The estimate for the first quarter eurozone Gross Domestic Product and employment are released on Tuesday, and inflation data for the bloc on Wednesday. Also of interest will be the minutes published on Thursday from the last ECB meeting and the Producer Price Index on Friday. As with the UK, the post Brexit row may harm the euro as the last thing either currency needs now is a trade war, especially with a real war on its doorstep already pushing inflation higher.

USD: The dollar has recently had analysts, commentators, and economists searching for superlatives, and last week was no exception. With the Federal Reserve set on a seemingly unswerving course to tighten policy with upward moves of at least 50bps at its next three meetings, it is hard to bet against the dollar. As we said earlier, investors are searching for safe havens for their money; as investors leave risk assets, the dollar’s rise looks assured. The only possible hiccough is that the world has been consistently buying the greenback, and at some point, profits will need to be taken. Retail sales are released tomorrow afternoon, which are forecast to show that domestic demand remains strong and that, unlike in the UK, there is no squeeze on spending power. Industrial Production, also released tomorrow, is forecast to stay strong. The Housing Data out on Wednesday will possibly be more interesting to see if the impact of rising mortgage rates is taking their toll, and the weekly jobs data on Thursday will be watched to see if last week’s data was a blip. There are also plenty of spokespeople from the Federal Reserve this week, with the most important being Jerome Powell tomorrow afternoon when another hawkish interview is expected.

A tale of two cities

The financial markets, both in the major cities, had another traumatic week as investors adjusted their portfolios to reflect rising interest rates.

On Wednesday, the Federal Reserve announced its interest rate decision, followed by the Bank of England on Thursday. The Fed raised the cost of borrowing in the US by 50bps, the first time we have seen a move of this magnitude since 2020. The Fed also inferred that there was a likelihood of another two 50bps hikes at their next meetings in June and July whilst announcing a relatively rapid balance sheet reduction. Although the prospect of a more significant rate hike of 75bps seems to be off the table, the overall tone from the Fed was, as expected, hawkish. In contrast, the Bank of England’s announcements appeared dovish and confused with a split Monetary Policy Committee voting for a token hike of 25bps. Unsurprisingly sterling plummeted whilst the dollar continued its seemingly unending march onwards and upwards.

Sterling also dropped against a resurgent euro, losing over two eurocents during the week, with the single currency possibly benefitting from the European Central Bank keeping a low profile. Although not as bad as feared for the Conservative government, the local poll results didn’t help the background music for sterling and the week, and it looks to have a tricky time ahead. Thankfully, this week, there are no major central bank meetings on the agenda, although there are plenty of speeches from policy makers. There are also some important economic releases on the way, with the reading for March US inflation (CPI) on Wednesday and the first reading of UK Gross Domestic Product (GDP) on Thursday. These figures will be released to nervy stock markets and a fraught geopolitical world. Northern Ireland will also start to reappear as a factor hampering sterling after Sinn Fein’s good showing in last week’s poll results. All in all, another testing week looks ahead for the financial markets.

If it was the best of times for the dollar, it certainly was the worst of times for sterling as it fell off a proverbial cliff last Thursday lunchtime. The Bank of England seems divided over how to tame inflation whilst forecasting that it may well touch 10% towards the back end of the year. Whilst a 25bps move was as expected, the size of the vote split for the action by policymakers was not. Sterling has now given back all its had earned gains and is back trading at 2020 pandemic levels. Although this was the fourth consecutive hike by the Bank, taking rates to their highest levels since 2013, there appears to be a reluctance to push them any higher, certainly not as high as the money markets had been forecasting. There is also a risk premium starting to come into play, which may gain momentum with Brexit and the Northern Ireland Protocol back in the headlines. This week’s data docket is relatively bare apart from the monthly and quarterly Gross Domestic Product figures. Looking back, January was a strong month in the UK economically, and that should be enough to keep the quarterly figure around 1%. However, the monthly data for March is expected to be poor as the cost of living crisis bites, possibly explaining the Bank of England’s hesitancy last week and, in doing so, adding to sterling’s woes. This afternoon Michael Saunders from the Bank of England will give a speech titled, tantalisingly, “Taking the Right Path”.

The euro mainly was side-lined last week as the Fed and Bank of England took centre stage, and it ended the week with modest gains against the greenback. It fared better against sterling, gaining over two euro cents on the back of the stuttering performance from the Bank of England. There are now clear hints that the European Central Bank will be looking to tighten policy by the end of the summer and lift interest rates from negative. The euro, of course, will remain under pressure whilst the war in Ukraine shows no likelihood of abating despite its inability to agree on a total embargo on Russian energy imports. The week ahead looks quiet, with Germany’s Consumer Price Index released on Wednesday and eurozone Industrial Production on Friday, the pick of the bunch. Joachim Nagel, head of the Bundesbank, is expected to adopt a hawkish tone when he gives a speech Tomorrow as is Isabel Schnabel who takes to the rostrum both on Wednesday and Friday.

The dollar spent another week challenging commentators to find new superlatives to describe its price action. After the Federal Reserve moved rates up and gave a generally hawkish statement, the dollar again climbed and is now sitting just shy of its highest level for 20 years on the Dollar Index. Risk sentiment remains shaky as the war in Ukraine is worsening and its impact on food and energy prices continues to feed into inflation. Wall Street is also on the back foot, and this is likely to continue as the Fed starts to drain money from the system and yields on US Bonds continue to rise. After better-than-expected employment figures gave the dollar a boost on Friday, this week sees the release of the other key data that the Federal Reserve follows with the publication of April’s Consumer Price Index on Wednesday, which hopefully will show a drop from its recent peak of 8.5%, still way above the Federal Reserve’s 2% target. The only other significant data is the University of Michigan’s Consumer Confidence report on Friday afternoon. However, there are a plethora of speakers from the Fed’s policymaking committee set to air their views. Raphael Bostic starts the ball rolling this afternoon and, tomorrow he returns to the microphone where he is joined by John Williams, Christopher Waller and Loretta Mester. Raphael Bostic is back again on Wednesday after the US inflation data has been released. On Thursday Mary Daly steps up and a busy week for fed speak draws to a close with Neel Kashkari and Loretta Mester on Friday afternoon.