Foreign Exchange

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!

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.