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Forecast
Trade Disputes
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Global Uncertainties
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Market Uncertainty
The British Pound is under pressure due to the UK’s growing debt, weak economic growth, and rising debt servicing costs. Ahead of the Spring Statement, concerns mount about whether Chancellor Rachel Reeves’ proposed £15 billion in public spending cuts will be sufficient. As the Pound holds steady against the Euro and US Dollar, analysts warn that insufficient fiscal action could lead to higher debt costs and further economic challenges for the UK.
The Euro weakened as it faced pressure following mixed PMI data. Manufacturing in the EU showed strength, particularly in Germany, but services remained weak in countries like France. This uneven economic performance raised concerns about growth, and the Euro’s decline was further influenced by expectations of upcoming US tariffs on April 2. These factors combined to weigh on the Euro amidst broader global market uncertainty.
The U.S. Dollar remained steady after four consecutive gains, with the Dollar Index holding at 104.29. Analysts highlighted the Federal Reserve’s cautious stance on rate cuts, which supported the greenback. With the upcoming US tariff implementation on April 2nd, concerns about potential market volatility are growing, particularly regarding the selective tariff policy that could impact global trade.
Structural Changes
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Risk Aversion
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Trade Developments
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Market Update: Currency Movements and Investor Sentiment
GBP Struggles Amid Fiscal Concerns
Yesterday, the British Pound faced a challenging start as concerns over the UK’s fiscal health and potential tax increases unnerved investors. The anxiety came ahead of Chancellor Rachel Reeves’ address to Parliament, where she was expected to outline the government’s fiscal plans. Despite the initial volatility, reassurances from Cabinet Officer minister Pat McFadden that no tax announcements were imminent helped to calm the markets, reducing some of the pressure on the GBP.
EUR Remains Static Amid Lack of Data
The Euro struggled to capitalize on the Pound’s difficulties, primarily due to a lack of significant economic data from the Eurozone. Investors in the EUR were hesitant to make bold moves ahead of critical data releases later in the week, including the Eurozone’s GDP figures for the second quarter and July’s inflation data. These upcoming reports are expected to provide more direction for the common currency.
USD Finds Support Ahead of Federal Reserve Meeting
The U.S. Dollar managed to regain some ground, driven by anticipation of the upcoming Federal Reserve meeting. Investor speculation centered on whether the Fed would signal any rate cuts, with soft inflation readings and dovish comments from Fed officials bolstering expectations of a 25 basis point cut in September. This anticipation led to increased flows into the greenback, reinforcing its position in the market.
Looking Ahead
As the week progresses, investors will be closely monitoring key economic indicators and policy announcements. For the GBP, continued clarity on the UK government’s fiscal strategy will be crucial. The EUR will likely see more movement post the release of the Eurozone’s economic data. Meanwhile, all eyes will remain on the Federal Reserve’s actions and signals, which will be pivotal for the USD’s trajectory.
Stay tuned for more updates as we continue to track these developments and their implications for the foreign exchange market. For personalized advice and detailed market analysis, please contact our team at Synergy Exchange.
Inflation fears haunt the markets
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.
Upward moves in interest rates ahead
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.