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Inflation – Battling the rising cost of living

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European stock markets are expected to open sharply lower this morning, continuing the global sell-off after red-hot inflation data in the US raised fears of aggressive Federal Reserve monetary tightening.

Following the data release, the dollar climbed to a near four-week high against a basket of currencies on Friday, after data showed U.S. consumer prices accelerated in May, strengthening expectations the Federal Reserve may have to continue with interest rate hikes through September to combat inflation. In fact, it’s going to be a big week for central banks, with the Federal Reserve widely expected to deliver a second 50 basis point rate hike on Wednesday. Investors will be watching closely to see what Fed Chair Jerome Powell has to say about future rate hikes after Friday’s much stronger than expected inflation data. The Bank of England is expected to deliver a fifth consecutive rate hike amid a mounting cost of living crisis.

GBP
The Bank of England was the first major central bank to start reversing its pandemic stimulus back in December but that did not stop U.K. inflation hitting a four-year high of 9% in April, almost five times the BoE’s 2% target. Following through with their roadmap, the BoE is widely expected to deliver what will be its fifth consecutive 25 bps rate hike since December on Thursday, despite a growing number of global central banks opting for half-point hikes. Nonetheless, the BoE expects inflation to exceed 10% later this year and Governor Andrew Bailey said in April the bank was walking a very tight line between tackling the surge in inflation and causing a recession.

It’s also a busy week for U.K. economic data, starting with GDP figures for April which will be released today and are expected to be flat. On the other hand, employment data on Tuesday is expected to point to continued tightness in the labour market, with unemployment seen declining while wage gains accelerate.

EUR
The possibility of a more aggressive hiking cycle later in the year is weighing on sentiment as the Eurozone economy struggles with slowing growth, exacerbated by the war in Ukraine, as well as rampant price increases. In fact, the euro lost ground on the prospect of the European Central Bank raising interest rates in a slowing economic environment. At her press conference on Thursday of last week, ECB President Christine Lagarde declined to give any concrete detail as to how the ECB intends to keep bond yield spreads within an acceptable range as it embarks on its first monetary tightening in 11 years. By contrast, she gave unusually detailed guidance about the path of interest rates, which may be 75 basis points higher by the end of September.

USD
The Fed is all but certain to raise interest rates by another 50 basis points on Wednesday, adding to the 75 bps of rate hikes already delivered since March.  Friday’s hot May inflation data has revived fears that Powell could flag a faster pace of future rate hikes; data showed that U.S. consumer inflation jumped by 8.6% year-over-year in May, its biggest gain since 1981 with gasoline marking a record high and the cost of food soaring. This has prompted concern for investors that an aggressive push higher on interest rates could tip the economy into recession. In fact, market watchers will be keeping a close eye on Powell’s press conference after the policy meeting and on the Fed’s updated economic forecasts as well as its “dot plot”, which shows the projected outlook for interest rates.

The Perfect Storm in Sight

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As the UK returns from a long weekend celebrating the Queens Platinum Jubilee, many headwinds are already setting the tone for the week ahead.

Prime Minister Boris Johnson will face a vote of confidence later today after the British leader was booed at various events over the past few days. Johnson, appointed prime minister in 2019, has been under growing pressure, unable to move on from a damaging report over parties held in his Downing Street office and residence when Britain was under strict COVID-19 lockdowns. If Johnson loses a confidence vote, he would be removed as prime minister and there would be a leadership contest to decide his replacement. In fact, there’s a growing risk the nation’s current account deficit, political turmoil, a deterioration of its relationship with the European Union over Northern Ireland and questions around the central bank’s credibility combine to create a “perfect storm.”

On the European front, equities ended last week on a negative note as data showed the U.S. economy added 390,000 jobs in May. This was more than expected and prompted investors to reassess the potential for rising interest rate hikes by the Federal Reserve in the months ahead. With this in mind, investors are keenly awaiting the release of Friday’s U.S. CPI report for May as this will act as a key input before the Fed decides how much to hike rates next week. Ahead of this, the European Central Bank meets on Thursday and is expected to use this get-together to make clear that rate hikes will be coming in the third quarter.

GBP
It’s not the first time in recent years Wall Street strategists have drawn parallels between the British currency and emerging markets. The comparison was made amid the UK’s torturous exit from the European Union, where political headlines whipsawed sterling as its behaviour broke from major peers.

Whilst not wishing to over-exaggerate GBP’s predicament as some kind of ‘end-of-days’ scenario, there are concerns that the increasing politicization of UK policy undermines the GBP in ways that would appear EM-like. There is a sense that something is changing in the UK, with the BOE increasingly hard to decipher and less transparent; a failure to discuss and acknowledge that Brexit has been a significant headwind to the supply side; and a sense that the BOE is losing control over its mandate.

In fact, the BOE has faced political attacks this month over its response to inflation, which is at its fastest rate in four decades. Despite four interest-rate increases since December and money markets bracing for more in each of its next five decisions, the pound is the third-worst performing major currency this year. At a point of increased uncertainty over domestic growth, signs of regional fragmentation and Northern Ireland-related risks, the UK will find it increasingly difficult to attract portfolio flows to finance a widening current-account deficit.

EUR
Top of the agenda for many market participants this week is Thursday’s meeting by the European Central Bank, which is expected to prepare the ground for an interest rate hike at its July meeting. While central banks around the world have begun their rate hike cycle, the ECB is seen as a step or two away from it. Eurozone inflation hitting record highs, though, has added more urgency to the discussion, and analysts expect this meeting to make clear that rate hikes will be coming in Q3. ECB president Christine Lagarde said as much in a blog post two weeks ago, so both the ECB statement and the press conference to follow will provide a chance for Lagarde to elucidate the road back to positive interest rates and to re-affirm the bank’s credibility. As of writing, market participants are currently pricing in a 125-basis point hike at the ECB’s four meetings this year. In fact, the EUR/USD rose 1.67% since the end of April and 3.55% from mid-May lows, suggesting the bank has re-won at least a little bit of that credibility with markets.

USD
Friday’s U.S. CPI report for May comes a few days before the next Federal Reserve meeting and will act as a final input before the Fed decides how much to hike rates. Inflation is expected to come in at 8.3% year over year, while core inflation (excluding energy and fuel prices) is expected to come in at 5.9% year over year. The latter number would mark the third month of consecutive declines and make the case that core inflation may have peaked, which would echo the slower wage growth in last week’s jobs report. At the same time, the overall inflation number of 8.3% would be close to the peak and given the pain at gas pumps and grocery stores, consumers may take little solace in knowing the core number is levelling out.

A holiday-shortened week

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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.

GBP
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.

EUR
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.

USD
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?

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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

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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

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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.

GBP
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”.

EUR
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.

USD
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.

The dollar continues to climb

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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.

GBP
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.

EUR
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.

USD
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

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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.

New quarter fresh uncertainty

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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.

GBP

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

EUR

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.

USD

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.

Inflation fears haunt the markets

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The week ahead sees a busy data calendar, especially in the United States, which has the release of the monthly employment data as well as the latest inflation report scheduled.

Gross Domestic Product is the major release in the UK, whilst Europe sees inflation and sentiment indicators released. Of course, geopolitical events will dominate, and hopefully, we will see some forward momentum in the peace process between Ukraine and Russia and risk sentiment will improve. Although not affecting the markets yet, there is a Presidential Election in France during April and soaring Covid infections in Europe factors that may soon concern investors. Closer to home, the markets will continue to digest Rishi Sunak’s budget whilst the ramifications from Brexit are never far from the front page. Finally, the week ahead may see some volatility midweek as we approach quarter-end and the rebalancing of portfolios after an extraordinary period of bond and equity price movement.

Relative calm returned to the currency market last week, with all the major currencies trading within a narrow range. Overall the direction of the G3 currencies followed risk sentiment when it improved sterling, and the euro rallied, and when it worsened, they drifted lower. The war in Ukraine played out in the background but had less impact on the currencies than the speeches of policymakers from the Federal Reserve. With the Federal Reserve sounding increasingly hawkish over the fight to control inflation, the derivative markets are giving a .5% upward move in interest rates after the next Fed meeting a better than 75% chance. The US bond markets also subscribe to this theory and ended a very volatile week with yields sharply higher. The Bank of England may also now be reassessing the timing and size of its next move after the disappointingly high inflation report published Wednesday. With the Bank of England and the Federal Reserve both looking to tighten policy, the odd one out remains the European Central Bank, limiting the euro’s upside potential for the time being.

GBP
The Bank of England, politicians, and the public had their worst fears confirmed last Wednesday with the publication of the UK’s inflation readings. As we are sure you know, the headline rate was the highest since March 1992, and worryingly it is yet to peak. With energy prices still yet to fully hit the indexes, it is not beyond reason to expect a double-digit headline figure over the coming months. The uptick places more pressure on the Bank of England, who have to explain in writing to Parliament when inflation tops 2%. With the inflation rate starting to run away, speculation is increasing that the Old Lady will hike rates more aggressively than they have recently, possibly by as much as .5% in line with expectations of the Federal Reserve’s moves. With rising interest rates, sterling should stay in demand against the euro; however, it feels like it is capped at its recent highs. This week looks set to be a quiet one for the data docket, with the main event being the release of the final reading of the Fourth Quarter Gross Domestic Product on Thursday. Also released will be Markit’s Manufacturing Purchasing Managers Index (PMI) on Friday. Several luminaries from the Bank of England are scheduled to give speeches this week including Governor Bailey later today and Ben Broadbent on Wednesday.

EUR
The euro is likely to stay under pressure from sterling and, in particular, the dollar until the European Central Bank signals that it is shifting policy to being less accommodative. This change is unlikely to happen whilst the bloc’s economies remain vulnerable to further energy price shocks due to the war in Ukraine. The single currency is also at risk of the side effects of a Russian default as several of its banks are deeply entrenched in the country. However, the euro is generally holding its ground, and it may be benefitting from all the bad news already being discounted. As we said earlier, geopolitics will drive sentiment this week, and we all hope that they take a turn for the better. It’s a quiet start to the week on the data front. The first interesting release is not scheduled until Wednesday when Business Confidence and Sentiment Indicators for the eurozone are released and Germany’s Consumer Price Index. Thursday sees German Retail Sales and Unemployment on the agenda, as well as the bloc’s Unemployment level. The week closes on a busy note with Eurozone Inflation published and Markit’s PMIs for Manufacturing. It is also a busy week for speakers from the European Central Bank, with Christine Lagarde and Fabio Panetta on the roster for Wednesday, followed by Phillip Lane on Thursday and Isabel Schnabel on Friday.

USD
The Federal Reserve is becoming increasingly uncomfortable with the level of inflation in the United States. With it now touching 40-year highs and yet to peak, the language has become increasingly punchy, and many now believe that the Fed will hike the cost of borrowing by .5% at both their May and June meetings. On Thursday, the US will publish its Personal Consumption and Income reports which may lend even more traction to the argument for aggressive hiking of rates. Last week saw the lowest ever level of job seekers confirming that the economy is in rude health. In reality, there are millions of jobs unfilled in the economy. Unlike most other developed nations, this is a concern due to its potential impact on wages, leading to an inflationary spiral. The week ahead sees no less than three employment reports starting on Wednesday with ADP’s private-sector report, followed on Thursday by the weekly jobless number. As usual, the first Friday of the month heralds the publication of the latest US employment figures in the guise of the Non-Farm Payroll report. Also scheduled is Consumer Confidence tomorrow, Q4 GDP on Wednesday and ISM Manufacturing PMIs on Friday. Finally, just in case you didn’t miss that extra hour in bed on Sunday morning, a reminder that the US is back to being 5 hours behind Europe from today.