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World Markets
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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Ructions & Turmoil
GBP: The British Pound saw a volatile week of trade and opens this morning’s session relatively flat as chaos amongst US and European banks led to readjustments of bets on further monetary tightening from all central banks. In fact, UK stock futures point to a weaker opening than other European markets as investors and traders see some contagion risks in the UK. However, the pound seems to be holding up surprisingly better than other G10 peers this morning. Looking forward, the Bank of England will announce their monetary policy decision on Thursday. While market participants expect a 25-basis point rate hike, it’s closer to a 50/50 call in the current highly volatile environment. Ultimately, market implied probability of a hike is 57% at the time of writing, although a big GBP rally may be prevented by policymakers strongly signalling a pause.
EUR: The Euro started this morning’s trading session on the back foot as investors try to understand whether major central banks will be able to contain the global financial and banking crisis. Over the weekend, UBS Group AG has agreed to buy Credit Suisse Group AG and will reportedly pay $3.23 billion for Credit Suisse, a fraction of its closing market value on Friday. Moreover, the Federal Reserve announced that it will restart offering daily swaps to the Swiss National Bank and the European Central Bank to assist with additional liquidity needs. Although these developments helped the market mood improve, safe-haven flows seem to have returned. Ultimately, investors might be assessing the latest action taken by major central banks as a sign that the liquidity issues could be deeper than initially thought.
USD: The U.S. Dollar rose slightly this morning as markets hunkered down on mounting fears of a banking crisis that has kept sentiment on edge for the past couple of weeks. However, market participants seem cautious over the greenback ahead of the Federal Reserve meeting this week, where the bank is expected to hike rates by 25-basis points. In fact, recent ructions in the banking sector saw markets betting that the Fed will soften its hawkish rhetoric to prevent further economic pressure from high interest rates. Although the Fed, along with other major peers, rolled out emergency liquidity measures over the weekend to support the banking sector and prevent further collapses, markets still remain on edge over more pain from the banking sector. Ultimately, traders are now uncertain over what signals the Fed will send to markets, given that its recent liquidity measures undermine a year-long struggle to tighten monetary conditions and fight inflation.
Dollar King… Again?
GBP: Sterling was a middling performer among major currencies last week as recent economic data suggests that the Bank of England may become slightly less aggressive when deciding on the future path of UK interest rates. Growth in the UK has flatlined, the jobs market remains strong, retail sales remain poor but marginally better-than-forecast, while core inflation is falling. This has lead many investors to believe that the BoE may decide that UK interest rates are starting to work and that they should be wary of making interest rates too restrictive. For now, the UK bank rate, currently at 4%, is seen topping out at 4.5% with a potential rate cut at the December meeting now starting to be priced in. Nevertheless, the British Pound may get a marginal boost in the coming days if market talk of an impending Brexit deal proves correct. In fact, UK PM Rishi Sunak is said to be in talks with the EU over an imminent deal on the Northern Ireland protocol.
EUR: The Euro started today’s session relatively flat, with investors cautious at the start of a week that includes the release of important Eurozone activity data as well as the minutes from the last Federal Reserve meeting. Today’s U.S. holiday is likely to limit trading volumes in Europe, but investors will also be wary of taking strong positions ahead of some important regional economic data. The highlight of the week will be tomorrow’s flash PMI data for February, which will show how well the Eurozone economy is performing after unexpectedly growing in the final quarter of 2022. Germany’s IFO Business Climate Index on Wednesday will show how the region’s largest economy is weathering the energy crisis, while the bloc is also to release final inflation figures for January on Thursday.
USD: The dollar was on the front foot this morning, supported by a strong run of economic data out of the United States that traders bet will keep the Federal Reserve on its monetary policy tightening path for longer than initially expected. However, trading is likely to be thin today, with U.S. markets closed for Presidents’ Day. Nevertheless, a slew of data out of the world’s largest economy in recent weeks pointing to a still-tight labour market, sticky inflation, robust retail sales and higher producer prices, have raised expectations that the U.S. central bank has more to do in taming inflation, and that interest rates would have to go higher. In fact, markets are now expecting the Fed funds rate to peak just under 5.3% by July. Moreover, hawkish comments from Fed officials have also underpinned the U.S. dollar, as they signalled interest rates would need to go higher in order to successfully quash inflation.
Renewed Pressure
It’s set to be a much quieter week on the economic calendar, but there’s still plenty for markets to mull over after last week’s slew of Central Bank hikes and Friday’s unexpectedly strong U.S. nonfarm payrolls report. In fact, data in the Eurozone and the U.K. will be closely watched.
GBP: The British Pound stumbled out of the gates last week as a lack of UK economic data and a downbeat market mood left Sterling vulnerable to losses against the US Dollar and the Euro. In fact, stronger headwinds hit the Pound as the week went on. Public-sector strike action continued to intensify and company insolvencies hit their highest level since 2009. Furthermore, markets expected the Bank of England to hint at an end to its tightening cycle at its Thursday meeting, and they were proved right. The BoE hiked rates by 50-basis points but signalled it may raise rates in smaller increments, if at all, in future meetings. Looking forward, UK economic data is in short supply through much of the week. As a result, the increasingly risk-sensitive Sterling could be primarily influenced by market mood through much of this week’s trade. Domestic news could also impact GBP. More downbeat headlines about the UK economy, worries about intensifying strike action, or political scandal and instability could add to a general sense that the UK is in a challenging situation, which may make Sterling a less attractive investment.
EUR: The Euro found some support this morning as Eurozone’s largest economy recorded monthly growth in its factory orders of 3.2% in December, a rebound from the revised slump of 4.4% the previous month. However, looking at the week ahead, the Euro could face selling pressure early on. Economists expect Eurozone retail sales to have slumped in December, with a forecast decline of 2%. This could raise concerns about a potential Eurozone recession, thereby denting EUR exchange rates. Moreover, a forecasted contraction in German industrial production on Tuesday could add to EUR’s woes. Ultimately, Germany is the largest economy in Europe, and manufacturing is a key part of the country’s economy. Signs of declining activity could add to Eurozone recession fears.
USD: The dollar held firm this morning after Friday’s strong U.S. jobs report suggested the Federal Reserve could stay hawkish for longer. In fact, the U.S. Labour Department’s closely watched employment report showed that nonfarm payrolls surged by 517,000 jobs last month; economists in a Reuters poll had expected a gain of 185,000. Consequently, the Dollar Index strengthened 1.1% against a basket of currencies, touching a 4 week high of 103.22. The Fed on Wednesday raised rates by 25-basis points and said it had turned a corner in the fight against inflation, leading investors to price in a more dovish path going forward. However, the eye-popping payrolls number along with U.S. services industry rebound in January have investors questioning whether the Fed is almost done with its monetary tightening policy.