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A tale of two central banks

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After the diversion of the central bank meetings last week, the week ahead is likely to be dominated by the geopolitical situation and the ramifications of the war in Ukraine.

Currencies will remain susceptible to sudden shifts in risk sentiment, which tend to benefit the dollar and will also be vulnerable to violent moves in the commodity markets. After breaching $130 a barrel, Oil has dropped back to lower levels; however, it is far from guaranteed that it will stay suppressed. Its moves will potentially impact energy importing currencies, particularly the euro. There are also potential shocks to the financial system as the sanctions on Russia continue to reverberate. So far, Russia has managed to make all the payments due on their dollar-denominated bonds, but there remains a risk of a sovereign default the like of which the markets have not witnessed before.

The Federal Reserve and the Bank of England unsurprisingly hogged the financial headlines last week. Analysts and the currency markets initially speculated on what the central banks would do and subsequently digested their actions. First up was the US Federal Reserve, which, as expected, raised interest rates by .25%, but what was a little surprising against the backdrop of the uncertainty caused by the war in Ukraine was how hawkish their tone was. The market is now expecting at least another six hikes in US rates this year. The Bank of England also raised rates by .25%, but they adopted a cautious tone in contrast to their fellow bankers across the Atlantic. The simple fact that one member of the rate-setting committee in the US voted to raise rates by .5% whilst one member of the equivalent in the UK voted to leave rates unchanged highlighted the different directions that the central banks are taking. Unsurprisingly the dollar ended higher over the week against sterling, and the euro also gained as investors started to doubt how much further UK rates would rise.

GBP
As we said previously, the Bank of England’s tone and actions were fundamentally cautious following its Monetary Policy Committee meeting last week. With so much uncertainty surrounding Eastern Europe and its effects on inflation and the economy, the Old Lady is understandably circumspect. Fewer rate increases are now expected, and the terminal base rate expectation has dropped to 2%. Consequently, sterling has fallen against the euro as the potential interest rate differential narrows and indeed, the European Central Bank approaches its own tightening cycle. This week, investors will assess whether the Bank of England is too timid when the latest inflation data is released on Wednesday with the Consumer Price Index, Producer Price Index, and Retail Price Index scheduled. Rishi Sunak delivers his Spring budget to Parliament on Thursday, and the preliminary, or flash, Purchasing Manager’s Indexes are released. A busy week for data concludes on Friday with February’s Retail Sales and the GfK Consumer Confidence report. It is also likely that Andrew Bailey or some of his fellow policy setters from the Bank of England will speak during the week.

EUR
The European Central Bank (ECB) sat on the side-lines last week and watched its peers raise rates by .25%. The ECB is caught between wishing to raise rates to contain inflation whilst worrying about a possible slowdown in the eurozone recovery. Last week most of the council members from the ECB aired their views, and it is starting to become apparent that they are also worried by the weakness of the euro, particularly against the dollar. Indeed Dutch central bank governor Klaas Knot, a council member of the ECB, said that further EUR/USD weakness would be unwelcome as Europe deals with an energy supply shock. He also suggested that interest rates may rise in the bloc towards the end of the year as he attempted to give the single currency a fillip. He was the most outspoken member of the council, but others also expressed their concerns. Tomorrow’s data docket is the EU Trade Balance, which will show the impact of the war on the bloc. On Thursday, Markit will release its flash Purchasing Managers Indexes for the eurozone and its constituent countries. We can also expect to hear more from ECB council members during the week.

USD
The Federal Reserve and its Chairman Jerome Powell probably had the most straightforward job of the major central bankers last week as the US is essentially the least affected by any commodity shortages caused by the war. Compared to its peers in the UK and the eurozone, the US economy is also in better shape, with unemployment at historically low levels whilst 10 million vacancies exist. However, inflation is a problem, and last week’s interest rate rise was only the first of what potentially will be further increases at every FOMC meeting this year. No less than 15 speakers from the Federal Reserve are scheduled this week to explain their rationale against the backdrop of the ongoing geopolitical crisis, starting with Jerome Powell this afternoon. Data wise, there are Housing reports on Wednesday that rarely move the markets, but the following day has a full schedule, including Markit’s Flash PMIs, Weekly Jobless total and Durable Goods. The data week draws to a close on Friday with the release of the Michigan Consumer Sentiment Indicator. Finally, a friendly reminder that the time difference between the UK and the US remains at an hour less than usual till next weekend when we move our clocks forward.

Upward moves in interest rates ahead

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This week we will see the response to the continuing rise in inflation from both the Federal Reserve in the US and the Bank of England closer to home, at their monthly meetings.

Both are expected to raise interest rates in what economists believe will be the start of a series of increases in the cost of borrowing as they attempt to put the inflation genie back in the bottle. However, both face the problem of second-guessing the impact of the war in Ukraine on economies. As oil prices rise, fears of a recession increase, and economists now have concerns that we could all now face a period of inflation and recession combined – so-called stagflation. Of course, overshadowing Central Bank meetings in London and Washington is the dreadful situation in Ukraine, and again this will dominate the markets, and we can only hope that some optimism returns soon.

Sadly, the financial markets were again dominated by the headlines coming from Ukraine. As risk sentiment ebbed and flowed, so did the currencies, with sterling falling as it soured and bouncing back when it improved. With the volumes traded in the GBPUSD generally less than in  EURUSD, sterling tends to move especially dramatically against the euro when volatility is elevated. The last week was no exception, and sterling ended the week lower against the euro as the single currency recovered against the dollar. The euro was helped by the European Central Bank adopting a more hawkish tone than anticipated after its monthly meeting. Increasing worries over the rise in inflation, set to be exacerbated by the continuing jump in energy prices, was behind the change in the ECB’s rhetoric. Inflation also dominated US markets towards the end of the week after another rise in the Consumer Price Index to a forty-year high of 7.9%.

GBP: With the war in Ukraine showing little sign of having a peaceful resolution, the dollar will continue to stay in demand for its safe-haven status, keeping downside pressure on the pound. Conversely, if any sign of escalation becomes apparent, sterling could be one of the beneficiaries as it remains fundamentally underpinned by the prospect of rising interest rates. The Bank of England is likely to reinforce sterling’s underlying strength at its monthly meeting of its Monetary Policy Committee this coming Thursday. The Old Lady was expected to raise the cost of borrowing before the outbreak of hostilities in Ukraine pushed energy prices higher. Whether accelerating inflation will overrule fears of a recession will give the Bank pause for thought is unclear. The currency markets expect another .25% hike, the third in quick succession. After February’s meeting, it was revealed that four out of the nine committee members had voted for a .5% move. Consequently, there is speculation that we may see such a move this month. Following the MPC meeting, Andrew Bailey will hold a press conference to expand on the reasoning behind the Bank’s actions. Ahead of the MPC meeting, the most recent employment figures are released on Tuesday and following it, on Friday, February’s Inflation data is released.

EUR: As we said previously, the European Central Bank took the markets somewhat by surprise with its hawkishness after its meeting last week. The euro recovered some of its poise after the meeting; however, in the race to tighten policy, the ECB lags behind the US Federal Reserve and the Bank of England, leaving it at risk. With both the BoE and the Federal Reserve set to move rates upwards this week, the single currency could face a tough time made worse by the bloc’s proximity to the war in Ukraine. The only data due out in the Eurozone this week is  Industrial Production data on Tuesday. But, with so much uncertainty over the cost of energy and its impact on industry, it’s unlikely that the data will move the market from being driven by geopolitical events.

USD: The Federal Reserve is the first of the two major central banks to host its monthly meeting this week when its members meet on Wednesday. The consensus seems to be for a 0.25% move upwards in the Fed Funds rate, although there remains the possibility, as in the UK, of a .5% move. Last week’s inflation print was close to 8%, and with it set to rise higher still, there will almost certainly be members of the committee who will favour the larger increase. Investors will also be watching out for the latest dot plot diagram detailing how Fed committee members see the course of interest rates in the coming year. The derivative markets predict six hikes in the coming year and will watch with interest to see if the Fed is in sync. As would be expected in these difficult times, Chairman Jerome Powell’s press conference will be significant in setting the tone for the markets. The week also sees the release of Retail Sales on Wednesday and February’s Industrial Production, and the weekly employment data on Thursday.

Choppy and volatile markets in prospect

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The week ahead looks sadly familiar on the geopolitical front, and we can only hope for some form of de-escalation in the conflict as soon as possible.

Understandably the markets will be driven by headlines and rumour again this week, with economic data taking a back seat. However, there are some notable points on the calendar this week that should catch the currency market’s attention, even if only momentarily. The most significant events scheduled are the meeting of the European Central Bank and the US Consumer Price Index, both scheduled for Thursday. We have a very quiet week on the data docket in the UK until Friday, when Gross Domestic Product is released.

Last week was one of the most volatile weeks in the financial markets in living memory. As the geopolitical news worsened and sanctions increased on Russia, risk sentiment and financial instruments gyrated wildly. Over the week, unsurprisingly, due to it being seen as a safe haven currency, the dollar appreciated against nearly all of its peers and, in particular, against the euro. This morning sterling has opened lower again against the greenback but has climbed against the euro. On Friday, sterling finally breached the top of its trading range against the euro that has held since the Brexit referendum in 2016. The euro has suffered in particular due to its proximity to the conflict and its reliance on Russia for energy. With the war worsening, there looks to be little relief to the choppy intraday movements that we have seen recently in the currency markets.

GBP
Sterling unsurprisingly fell against the dollar last week, ending up nearly a cent and a half lower after what was very volatile trading. As we said earlier, with geopolitical headlines dominating traders’ thoughts, the intraday movements were choppy, and this is, of course, will remain the way of things in the foreseeable future. Against the euro, sterling finally appears to have broken upwards through the technical resistance level that, as we said previously, has held for nearly six years. The only data set released this week that is likely to impact the markets is January’s Gross Domestic Product number. After a slight decline in December, a modest uptick is expected, reflecting the return of the consumer in the New Year. Speculation, of course, will continue over the next Bank of England meeting next week with expectations of a further base rate rise helping to underpin sterling.

EUR
The euro has endured a torrid time recently, seemingly being hit with bad news from every direction. The European Central Bank meets this coming Thursday, which, politics aside, is the major economic event this side of the Atlantic. Last Thursday’s release of the minutes from their previous meeting revealed a central bank that was more hawkish than had been anticipated. With inflation being pushed higher in the bloc by the war in Ukraine, the pressure is on the ECB to move towards normalising policy. But with a conflict on its doorstep with unknown consequences, the ECB may err on the side of caution. With this in mind, the markets expect the bank to stick broadly to its asset purchase programmes, winding down the Pandemic Emergency Purchase Programme this month March whilst increasing the Asset Purchase Programme. As important as any tinkering to policy will be Christine Lagarde’s messages at her press conference following the meeting.

USD
Jerome Powell and his colleagues have recently reinforced the case for a .25% rate rise at the next Federal Open Market Committee meeting on the 16th of March. After a particularly strong Non-Farm Payroll number, last week’s employment data strengthened the belief that the economy is now running on all cylinders. The concern for the Fed is how to tame inflation without killing the economy. At present, the rate of price increase is at levels last seen when President Reagan was in power some forty years ago when interest rates were raised to an incredible 21.5% to combat it. During his testimony on Capitol Hill last week, Jerome Powell argued that war has brought more uncertainty and that the Fed needed to be “nimble”. Derivative markets continue to price the prospect of six further rate hikes for the year whilst ignoring the threat of an oil-induced recession. Whether the necessity for such an aggressive series of rate hikes is needed will become clearer after the release of the latest inflation data on Thursday. Analysts are forecasting that the annual rate of the Consumer Price Index (CPI) will rise to near 8%, which would be the highest rate of inflation since January 1981. There are no speakers from the Federal Reserve scheduled as they are in blackout now till their next meeting. Apart from Thursday’s CPI print, the only notable data releases are the weekly jobless total on the same day and the University of Michigan consumer sentiment surveys on Friday.

Geopolitics dominate the world’s financial markets

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Following the weekend’s events, the Russian Rouble has gone into freefall, and the flight to safe assets continues in the currency markets, with the dollar a primary beneficiary.

The markets have never seen such a large country cut out of the financial system, and the impact of such a bold move is yet to be fully understood. With geopolitics now wholly dominating the world’s financial markets, economic data will understandably be of secondary importance for the near future. However, markets will settle and take notice of the fundamentals at some point. With the impact of the war in Ukraine still unfolding, today’s view of the week ahead is a little shorter than usual as the likelihood is that there will unforeseen developments politically that are more likely to drive the direction of currencies in the coming days.

Last week the world received a jolt in the early hours of Thursday morning as Russia launched its invasion into Ukraine. The search for safe assets accelerated, and the usual suspects benefited with the dollar, the Japanese yen and the Swiss franc gaining ground. The euro, in particular, suffered, giving back most of its recent gains whilst sterling also fell to its lowest level against the dollar this year. Over the weekend, the West has toughened its stance and imposed strict sanctions on Russia, its key officials, and its high-profile oligarchs. Most Russian banks have been shut out of the SWIFT messaging system, making it nearly impossible to conduct international business and cutting Russia out of the global financial system.

GBP
With the flight to safe-haven assets continuing, sterling is likely to remain under pressure against the dollar in the days ahead. But with the war in Ukraine on Europe’s doorstep, the pound should continue to hold steady and probably appreciate against the euro. We have in prospect an unusually busy week from the talking heads of the Bank of England with all the members of its Monetary Policy Committee taking to the microphone over the next couple of days. Before last week’s events in Ukraine, the derivative markets were pricing in at least five more increases in the cost of borrowing this year. With energy prices now likely to spike even higher, it will be interesting to see how hard the Bank’s officials push back on this. Data wise, in common with the rest of the world, Markit will release its final takes on Manufacturing Purchasing Managers Indexes (PMI) tomorrow, Services  PMI on Thursday and Composite PMI on Friday.

EUR
Out of the major currencies, the euro remains the most vulnerable due to Europe’s proximity to the ongoing war in Ukraine. Data wise tomorrow, Germany releases its inflation figures, and Eurostat will release the preliminary inflation on Wednesday. Data for Europe. With oil and gas prices rising sharply, these figures are arguably already out of date. However, with the European Central Bank meeting next week, a high figure may put further pressure on its council members to tighten policy just when they don’t need it. Also released are the Purchasing Managers Indexes across the eurozone, and the minutes from the last ECB meeting are published on Thursday. Finally, we will be listening out for Ursula von der Leyen and the President of the ECB, Christine Lagarde, for words of guidance through this troubled time.

USD
Usually, the first week of the month is dominated by employment data culminating in the publication by the US Labour Depart of the Non-Farm Payroll data at the end of the week. With the Russian assault on Ukraine likely to continue through the week, they will now be of secondary importance to the testimony from Federal Reserve Chairman Jerome Powell when he faces the House and Senate banking committees on Wednesday and Thursday this week. With the US and its economy now in a very different place to where it was at the time of the Federal Reserve’s last meeting, he is likely to be more cautious and less hawkish than he was then. There is also a packed data docket starting tomorrow with ISM’s take on Manufacturing which they follow up on Thursday with Services. As we mentioned earlier, unemployment is the key data starting with ADP’s white-collar report on Wednesday, followed by the weekly jobless report on Thursday and finishing with Non-Farm Payrolls on Friday, which again are expected to show a good increase in employment.

More diplomatic worries in prospect

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The financial and currency markets were as wild last week as the weather was in the UK, and although the weather has slightly calmed this morning, it is unlikely that the markets will.

With Russia still threatening to invade Ukraine, the markets will remain on tenterhooks with sentiment as fragile as the peace is. As expected, the dollar, yen and Swiss franc were the primary beneficiaries as investors looked for a safe haven. The dollar did suffer some weakness as bond yields dropped as investors switched from riskier assets into them. Still, until, hopefully, a peaceful resolution is found, the dollar will stay well supported. Sterling also performed well last week after Employment, Inflation and Retail Sales data beat expectations. With the UK economy running hot, expectations are mounting for the Bank of England to take further action and raise the cost of borrowing at its next meeting. Sterling should remain underpinned by Base Rate rising again and indeed by another five increases in the coming year if the derivative markets are to be believed.

Worryingly the week ahead looks likely to follow a similar course to last week, with geopolitical headlines influencing the markets more than economic data. With this likelihood in mind, the euro could well stay under pressure due to its proximity to the dispute. The single currency is also not helped by the reluctance of any of the mouthpieces from the European Central Bank to grasp the nettle over the timing of their potential move to less accommodative policies. Last week speakers from the ECB dodged these hard questions, which is expected to continue for the foreseeable future. Away from geopolitics, it’s hard to see any economic data, apart from Consumer Expenditure in the US that is likely to shake the markets too vigorously. The only other data of note are the Markit Purchasing Managers Indexes published throughout the G10 on Tuesday and Wednesday.

GBP
As expected, after the strong sets of employment and inflation reports, UK retail sales bounced back strongly in January, as the influence of Omicron dissipated. These figures reinforced the idea that the UK economy had started the year strongly, convincing the markets that their aggressive pricing of tightening from the Bank of England is correct. Although it must be said that several respected analysts think that a base rate of nearly 2% by the end of the year is unlikely. The week ahead will be dominated by the state of play in Ukraine with very little consequence on the economic front scheduled for release, leaving sterling at the mercy of event some 1500 miles away. The pick of the bunch is Markit’s Purchasing Managers Indexes, expected to show a healthy bounce back, Indexes which are published as this note hits your inbox. Tomorrow Dave Ramsden from the Bank of England is scheduled to speak, and on Thursday, Andrew Bailey is due in front of a Treasury Select Committee at the Houses of Parliament.

EUR
The euro managed to hold relatively steady last week despite the crisis on the borders of Ukraine. With this situation ongoing and at present and looking unlikely to be resolved in the near future, investors are likely to remain exceedingly cautious of the euro. Indeed, if the possibility of a diplomatic solution recedes further or the Russians advance into Ukraine the single currency could see some fresh selling. With this in mind, this week’s economic releases are almost of secondary importance to the market. Still, we will watch out for signs of economic recovery from the Omicron variant in both the eurozone’s PMIs and Germany’s Ifo sentiment surveys. Also of interest will be the comments from Pablo Hernández De Cos, Luis Guindos and Isabel Schnabel from the European Central Bank. However, after last week’s failure to give any clues to the ECB’s thought process over possible changes to their economic policies, we won’t be holding our breath.

USD
Nearly all the movement in the currency markets were driven by geopolitics last week, and this week looks likely to be the same as a diplomatic solution to the problems in Ukraine is searched for. With this in mind, the dollar and other safe-haven currencies, the yen and Swiss franc would appear to have a limited downside. The data docket looks relatively bare with Markit PMI readings out tomorrow and fourth-quarter Gross Domestic Product, Initial Jobless Claims and the pick of the bunch Personal Consumption data on Friday. It’s another busy week for the Federal Reserve’s mouthpieces, with Raphael Bostic, Loretta Mester and Christopher Waller slated to speak, all of whom are generally hawkish. With the next Federal Reserve, Open Market Committee meeting fast approaching, the Fed speak will continue to be dissected for hints to whether the Fed is likely to front-load its rate hikes with a 0.5% move in March.

Scandinavia
The Swedish krona was rangebound throughout most of last week and was mostly affected by news coming out of Ukraine. The Riksbank’s decision to keep rates unchanged did not surprise anyone but the market did focus on Governor Ingves’ comments about future potential rate hikes. Today we will get the minutes from that very meeting and on Thursday the latest Unemployment figures are released. Despite the price of gas increasing the Norwegian Krone has had a lacklustre month so far and it weakened against the euro throughout last week. This week sees no important data releases.

Financial markets get the jitters

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A relatively quiet week sparked into life last Thursday afternoon after the release of a slightly higher than expected Consumer Price Index from the US. At 7.5%, the index is at its highest level for over four decades, and worryingly the core figure is also rising steadily.

In response, yields on US bonds rose sharply, as did interest rate projections in the derivative markets. James Bullard, from the St. Louis Federal Reserve, reacted by suggesting that the cost of borrowing should rise by 1% between now and July and even suggested that the Federal Reserve could hold an emergency meeting and raise rates. This reaction smelt slightly of panic to the markets, and as would be expected, stock markets started to slide, pushing the dollar higher as investors searched for safer assets. Sterling fared better than the euro as expectations are that the Bank of England will again raise rates in March whilst the European Central Bank council members started to dial back their hawkishness.

With a quiet week ahead, at least for economic data, elsewhere attention will switch to the UK this week. With the next meeting of the Bank of England looming, the release of the UK’s inflation indexes this coming Wednesday will be studied with interest. With the increases in energy prices starting to come through into the numbers, expectations are for another jump. Elsewhere geopolitics will continue to unsettle the markets, with President Putin becoming increasingly belligerent over his intentions towards Ukraine whilst President Biden back peddles. Over the weekend tensions escalated with countries, including the UK, advising its citizens to leave Ukraine as fears of a Russian invasion grew. Elsewhere Brexit negotiations still rumble on, as do Boris Johnson’s domestic problems; however, a quieter week on that front with parliament on recess may be on the cards.

GBP
After last weeks inflation shock in the US, the UK takes centre stage this week with the release of both employment and inflation data. First up is the unemployment data, released tomorrow, which is expected to edge lower again to virtually pre virus levels. With markets now expecting further moves upwards in Base Rate at the Bank of England’s next meeting followed by another one in May Wednesday’s Consumer Price Index will be of some importance. Most analysts are looking for a slight drop in January’s headline figure but for it to bounce back and peak in April. If there is no apparent easing in the figure sterling could make further gains in particular against the euro. Also scheduled for release, but not quite as important as the CPI figure, are January’s Retail Sales which are published on Friday.

EUR
The euro was buffeted by the storms that crossed the Atlantic following the release of the US Consumer Price Index and the responses from the mouthpieces of the Federal Reserve. Christine Lagarde’s attempts to soften her hawkish rhetoric of the previous week unsettled the markets, as did the hawkish comments from the new President of the Bundesbank, which highlighted the frictions inherent in the European Central Bank’s council. Contradictory speeches were also delivered by Phillip Lane and Isabel Schnabel leaving the ECB in a catch 22 situation. As well as its internal problems, investors are also nervous about European assets as the temperature continues to rise between NATO and Russia on Europe’s Eastern border, keeping a lid on any advances by the euro. The only data of note due this week was out tomorrow when Employment and Gross Domestic Product for the Eurozone published and the ZEW sentiment surveys for the zone and its constituent countries. However, there are some notable speakers who will have a chance to give more clarity to the ECB’s position. The first opportunity falls to Christine Lagarde today and then Isabel Schnabel has a chance to reiterate her hawkish credentials and Phillip Lane his dovish ones on Thursday.

USD
With minimal top tier data release out of the US this week, the dollar’s direction is likely to be driven by the continuing fall out from last week’s Consumer Price Index. Financial markets are looking for now looking for a rise in rates at the next Federal Reserve meeting on 16th March. The derivative markets are suggesting that there is a better than 50/50 chance of a .5% rise to be followed by at least another four hikes through the rest of the year. However, there is another set of inflation figures released before that meeting and the markets and consequently, the dollar may have got ahead of itself. On Wednesday Retail Sales will be watched for any further signs of weakness that they have shown recently but with the effects of the Omicron variant still evident, some softness may be expected in them.  The only other top tier figures scheduled for release are for Industrial Production, also on Wednesday, and the weekly jobless total on Thursday. Away from data, the market will be studying the minutes from the last FOMC meeting, which are released on Wednesday evening, to see how concerned the Fed really is over inflation.

Scandinavia
Despite a somewhat hawkish Riksbank, the market expected even stronger language from Governor Ingves making the Swedish krona weaken further. It reached levels last seen in early 2020 on Thursday. Focus this week will be on the situation in Ukraine as any talk about military action could potentially have a negative impact on beta currencies such as the krona. On Friday, the latest CPI figures are released and will be closely monitored by market participants. Over in Norway, the country is preparing for ex-Prime Minister and current Head of NATO, Jens Stoltenberg to take over the helm at Norges Bank. Given the previous political affiliation of Herr Stoltenberg, some questions have been raised in regards to his fitness for the role. This week the latest GDP figure is released on Wednesday.

A change of mind for Christine Lagarde

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Last week will go down as the week when central banks finally woke up to the threat of inflation and started to move to try and contain it.

The Bank of England was the first to follow on from the hawkish Federal Reserve and raised the cost of borrowing to .5%. Indeed, almost half the Monetary Policy Committee wanted to increase it further, so if things stay as they are, the odds are on a further move upwards in March. The Bank of England’s move was fully anticipated in the markets; however, sterling initially jumped on the thoughts of the further hike next month. The move upwards, particularly against the euro, was short-lived and reversed after Christine Lagarde grudgingly acknowledged that the ECB might also have to tighten policy. The change in tone from the ECB caught the market somewhat on the hop, and traders rushed to cover their short euro positions, causing sterling and the dollar to suffer setbacks.

The week of surprises had one trick left, which was revealed on Friday afternoon when the US Labour Department announced that Non-Farm Payrolls had increased by no less than 467,000. The market had been bracing for a much lower number, possibly a negative number after the White House strongly hinted as much. Unsurprisingly the dollar regained some lost ground and has opened this somewhat steadier. It was not only busy in the money and foreign exchange markets but also in the background the world’s stock markets continued to wobble as investors reassessed their risk appetite. Despite no central bank meetings being scheduled this week, no doubt there will be plenty of their members stepping up to the microphone to explain their actions further. Finally, the trials and tribulations of Boris Johnson look set to continue, with some commentators suggesting he may face a no-confidence vote in the coming days.

GBP
The pound again confounded many in the market when it finished the week lower against the euro than it had started despite the upward move in the base rate. As we said earlier, the Bank of England is looking likely to move rates higher again in March. This would typically lead to a sterling rallying; however, buried in the footnotes to last week’s Monetary Policy Committee meeting, the Bank states that it expected inflation to drop relatively quickly from its elevated levels. Some took this as meaning that the peak of interest rates will be somewhat lower than anticipated. UK gilts are also pointing in this direction and giving signals that we may well be heading for a recession. This week is a quiet week for data, with the only meaningful release being Gross Domestic Product (GDP) on Friday. As would be expected after the hit to the economy that Omicron delivered in December, the figure is forecast to have fallen by about half a per cent. Huw Pill, the Bank of England chief economist, speaks on Tuesday as Andrew Bailey on Thursday evening. With a dearth of data due, the focus may turn to Boris Johnson’s problems and the mounting tensions with Europe over the Northern Ireland Protocol.

EUR
After its best week of the year, we will be watching to see if the euro can consolidate its gains against sterling and the greenback. After Christine Lagarde and the ECB took a hawkish turn last week, it appears the period of policy divergence between them and their peers, the Bank of England and the Fed, maybe coming to a close. The week ahead sees a relatively calm data docket, with the German Consumer Price Index on Friday being the highlight. With Germany’s understandable obsession with inflation, a high number would place further pressure on the ECB and increase the anticipation of a tightening of policy by them sooner rather than later. Christine Lagarde has another opportunity to expand on her change of heart this afternoon when she gives a speech, as do Phillip Lane and Eric De Guindos on Thursday. Politically, Italy seems to have resolved its domestic issues with Sergio Mattarella re-elected whilst President Macron takes to the centre stage in an attempt to get President Putin to back down from invading Ukraine.

USD
At long last, after a period of denial Jerome Powell and the other governors of the Federal Reserve seem to be taking decisive action on inflation. This week focus will switch from inflation to the less thorny problem of employment with this month’s publication of Non-Farm payrolls on Friday. With Omicron still disrupting large swathes of the economy, expectations are for a low gain in employment of about 100,000. It must be remembered that there are about 10 million vacancies, and one month’s figures are unlikely to upset the chain of events to higher interest rates that Jerome Powell has started. The ISM Manufacturing Purchasing Managers Indexes are due out tomorrow, the ADP white-collar labour figures on Wednesday, the weekly jobless total, and the Markit Purchasing Managers Indexes on Thursday to digest. As usual, after a Federal Open Market Committee meeting, several governors of the Fed are expected to speak and air their views on inflation.

Scandinavia
The Swedish krona continued to weaken throughout last week and is now once again at levels last seen in 2020 against the euro and sterling. With no important data releases scheduled for this week but for the Services PMI, the krona will once again be left to the mercy of the markets with very little to defend itself. Tensions over Ukraine are expected to be the main influencer.
With gas prices soaring, the Norwegian krone has been able to stand its ground against most other G10 currencies. This week sees no data releases that are considered significant; however, we will watch the House Price Index release to see whether last year’s two rate hikes have managed to put a dent in the booming property market

The Bank of England steps into the spotlight

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The spotlight switches across the Atlantic for part of this week with both the European Central Bank and the Bank of England both meeting, with the Old Lady expected to move the base rate up to 0.5%.

As last week started, it gave a hint to the world of the volatility in store as investors realised that the days of cheap and easy money in the US were well and truly ending. With stock markets moving in ways that they have rarely done in the last forty years, risk sentiment took a turn for the worse, and as it did, the dollar became even more attractive. The worst fears of many investors became a reality when the Chairman of the Federal Reserve appeared after their monthly meeting and gave an uber hawkish press conference. He didn’t actually commit to any immediate moves but made it patently clear that controlling inflation was now their uppermost priority. With analysts predicting anything from 3 to 7 moves up in interest rates this year, it was no wonder that the dollar gained ground in particular against the euro. Incidentally, this would be their first back-to-back move since June 2004.

After their meetings, both on Thursday, the US Labour Department will release its monthly Non-Farm Payroll report, often a market-moving event. Unusually, there is also great political drama that could cause even greater market mayhem. With Russia still massing troops on the border with Ukraine, the euro will remain pressured, especially with the threat to its gas supplies from Russia. In the UK, Boris Johnson faces another problematic week as he waits, as the rest of parliament does, for the publication of the Sue Gray report into “partygate”. All in all, another exciting week in prospect.

GBP
Sterling in common with most, if not all, G10 currencies suffered at the hands of King dollar last week. However, it was not all doom and gloom as it regained almost all of its recent losses against the euro. And this morning, it is back knocking on the door of its best levels since Brexit against the single currency. Attention will turn to Threadneedle week at lunchtime on Thursday when Bank of England Governor Andrew Bailey will announce the decisions of the Monetary Policy Committee and the rationale behind them. With the threat of Omicron receding and society opening up, the UK looks like it’s returning to normal. Unfortunately, the flip side of the recovery has been the jump in inflation to levels last seen in the 1980s. Unemployment, which the Bank had been concerned about, is looking under control, giving the bank comfort for any hike in the base rate. As we said earlier, it is now widely expected that the base rate will be increased to .5%, which the money markets are predicting will be the first of several moves this year before it peaks at just below an unlikely 1.5%. The Bank may also adjust its Quantitative easing policy and possibly allude to reversing it with quantitative tightening as it changes its view on inflation and wages.EUR
The euro was under the cosh again last week as the policy divergence between the European Central Bank and its main rivals was laid bare by the hawkish statements of Fed Chairman Jerome Powell. This week could be a big week for the euro with the publication of the 4th Quarter’s Gross Domestic Product later this morning and Inflation data before the European Central Bank meets on Thursday. With the eurozone still way behind the UK and US, no great shocks are expected from the ECB. Indeed, the most interesting part will be the language that its president Christine Lagarde chooses to use in her press conference after the meeting. Although inflation isn’t rising as sharply in the eurozone as it is elsewhere, that’s not to say that there is not a growing issue causing a divide in the council. Her challenge will be to talk tough on inflation to appease the hawks whilst reassuring the doves on the council that nothing dramatic is planned. Whilst the ECB finds itself in this fix, the single currency’s problems are likely to mount against those currencies that are already tightening policy. Indeed, some expect the single currency to test its lowest levels against the dollar and sterling.

USD
At long last, after a period of denial Jerome Powell and the other governors of the Federal Reserve seem to be taking decisive action on inflation. This week focus will switch from inflation to the less thorny problem of employment with this month’s publication of Non-Farm payrolls on Friday. With Omicron still disrupting large swathes of the economy, expectations are for a low gain in employment of about 100,000. It must be remembered that there are about 10 million vacancies, and one month’s figures are unlikely to upset the chain of events to higher interest rates that Jerome Powell has started. The ISM Manufacturing Purchasing Managers Indexes are due out tomorrow, the ADP white-collar labour figures on Wednesday, the weekly jobless total, and the Markit Purchasing Managers Indexes on Thursday to digest. As usual, after a Federal Open Market Committee meeting, several governors of the Fed are expected to speak and air their views on inflation.Scandinavia
The Swedish krona continued to weaken throughout last week and is now once again at levels last seen in 2020 against the euro and sterling. With no important data releases scheduled for this week but for the Services PMI, the krona will once again be left to the mercy of the markets with very little to defend itself. Tensions over Ukraine are expected to be the main influencer.
With gas prices soaring, the Norwegian krone has been able to stand its ground against most other G10 currencies. This week sees no data releases that are considered significant; however, we will watch the House Price Index release to see whether last year’s two rate hikes have managed to put a dent in the booming property market.

All eyes on the US Federal Reserve

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This week we have the first opportunity of the year for a central bank to signal its intent to control inflation when the American Federal Reserve hold their Open Market Committee meeting.

Committee members, including Chairman Jerome Powell, have been increasingly vocal over their concerns about rising prices. It is expected that some action will be taken after the meeting, possibly including a surprise rate rise. There are also preliminary Purchasing Managers Indexes to digest and the ongoing geopolitical worries to contend with, primarily on Ukraine’s border, where Russia maintains a significant troop presence. In the UK, the so-called ”party gate“ report by Sue Gray is expected to be published and may determine the future of Boris Johnson. Elsewhere in Europe, politics is also starting to play an increasingly important role in the euro’s direction. France and Italy face elections whilst the Green Party in Germany is embroiled in an investigation over Covid related financial impropriety.

GBP

The pound touched its highest level against the single currency since June 2016 before falling back to finish slightly lower on the week. Against the dollar, it also ended a volatile week on the back foot. Sterling was helped by the prospect of the Bank of England raising rates at its next meeting after a higher than expected inflation figure was announced combined with a solid employment report. Regardless of the outcome of the “partygate” investigation into the Prime Minister’s behaviour, the main focus for sterling will be the Bank of England’s Monetary Policy Committee meeting next week. Some fresh insight into the UK-EU Brexit negotiations may also be after officials meet today. The preliminary (flash) Purchasing Manager’s Indexes for Manufacturing and Services, published as this note lands in your inbox, are the only top-tier data scheduled this week.

EUR
After a week where the European Central Bank (ECB) did nothing to dispel the perception that they won’t be changing their opinion that the current bout of inflation is transitory or moving interest rates up any time soon, the euro ended lower again. Until the ECB decides to start thinking about increasing interest rates, the single currency will continue to underperform. Also of concern to euro watchers are the massed troops on its Eastern border and the very real threat of Russia invading Ukraine. The data docket is a bit busier this week than recently, starting today with the preliminary Purchasing Managers Indexes for Germany, France, and the Eurozone published this morning. Tomorrow Ifo will release their Business Climate Condition survey. The final reports for the week are the Eurozone Business Confidence, Economic Sentiment and Consumer Confidence reports published on Friday.

USD

The financial world will turn its ears and eyes towards the US on Wednesday afternoon and early evening when the Federal Reserve will conclude their first meeting of the year. With the economy having regained all of its lost output, inflation running at its highest rate for 40 years and the unemployment rate dropping below 4%, it is hard not to argue that the US economy has returned to normal. Most analysts are forecasting that the Fed will now start tightening policy, possibly with an immediate end to its policy of asset purchasing through its Quantitative Easing program. There are also some thoughts that the Fed will increase interest rates by .5% which could rapidly appreciate the dollar. Building up to Wednesday’s meeting and its subsequent press conference, the market is likely to remain volatile. Aside from the Federal Reserve meeting, the US has its flash PMIs published later today and on Thursday, Durable Goods, Weekly Jobless Claims and 4th Quarter GDP. A busy data week comes to a close on Friday with December’s Personal Income, Personal Consumption and, most importantly, its Personal Consumption Expenditure Index.

Scandinavia

Last week the Swedish krona traded slightly outside the January range against the euro and sterling. This was mainly due to stock market sell-offs affecting beta currencies and general all-around sterling strength. This week the latest PPI figure is released on Wednesday, together with the Trade Balance. Friday sees a bonanza of data being released, and we will pay the most attention to the latest Gross Domestic Product figures. On a Quarter-On-Quarter basis, the Nordic region’s largest economy is expected to have grown 1.3%, and Unemployment is predicted to be steady at 7.5%. Over in Norway, Norges Bank Governor Olsen offered no surprises as he kept rates steady and did not offer much in terms of future guidance either. This week the December unemployment rate is released on Thursday, which is expected to come in at 3.6%.

Keeping the earth prosperous

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In the week when world leaders came to together to climate change at COP26 Summit, there was some significant developments and discussions in the markets about keeping the earth both green and prosperous for the next generation.

Keeping Earth Green

GBP:

The scaling back of the row over fishing licences with France failed to give sterling much impetus yesterday, and it has continued to trade in a very narrow range with a slight bias to the downside. The pound is likely to stay trading in a similar fashion ahead of yesterday evening announcement from the Federal Reserve and today’s Monetary Policy Meeting at the Bank of England. The only macro-economic data that may pique investors’ interest is the IHS Markit Purchasing Managers Index for the service sector released later this morning.

EUR:

According to the latest report from IHS Markit, European Purchasing Managers are still worrying about supply bottlenecks, particularly in Germany. The indexes put a little pressure on the euro in quiet trading on Tuesday, and overnight it has slipped slightly against the dollar as the Fed’s decision comes into focus.

Yesterday morning Eurostat published the September Eurozone Unemployment Rate, and later, European Central Bank board member Frank Elderson will speak twice at the Cop26 conference. However, this afternoon’s speech at the celebrations for the 175th anniversary of the Banco de Portugal by ECB President Christine Lagarde may be more enlightening on current ECB policy.

USD:

The US stock market had a slight wobble yesterday as the reality that the end of easy money may be drawing to close hit home. Like its British cousin, the greenback has been trading in a tight range as it awaits this evening’s confirmation that the Federal Reserve will now start tapering its monthly bond purchases by approximately $15bn. During the day, before Jerome Powell takes to the podium at the Fed’s press conference, the first of this week’s employment data is released when ADP publish their predominantly white-collar labour report. Markit and ISM are also scheduled to release Purchasing Managers Indexes for the Service sector, but they are unlikely to shake the markets with such an important event later.