World Markets

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.

Farewell Mrs Merkel

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In the week that Angela Merkel stepped down from her prominent as Chancellor of Germany, there was some significant developments with Central Banks on the markets last week.  

Central Banks dominated the markets last week with what at times appeared an overload of information emanating from every corner of the globe. The most positive action was taken by the Norges Bank, which became the first G10 central bank to increase interest rates since the pandemic began. The Bank of England was a little more intriguing, but there is a clear shift in expectations in the Monetary Policy Committee (MPC), and this has been reflected in the derivative markets who are now signalling a rate rise, albeit by only 0.15%, next February. The US Federal Reserve were not quite so aggressive, but the “dot plot “did show that committee members were bringing forward the timing of the first move upwards of interest rates to 2022 from 2023. As expected, with the European Central Bank still some months away from tightening, the euro retreated against both sterling and the dollar.

Central Banks

The week began with a sharp sell by the world’s stock markets and a subsequent flight to the safe-haven dollar pushing beta currencies such as sterling south. The potential collapse of the Chinese real estate group Evergrande triggered the move. Although the panic had subsided by Tuesday, the spectre of Evergrande defaulting is still haunting the market and may reappear this coming week. The Social Democrats (SPD) scored a narrow win in the German election yesterday but cannot, as yet form a government. The country now faces months of horse-trading before a coalition is agreed upon and formed. With a relatively quiet week in prospect from a macro-economic perspective, the fallout from the election in Germany will be the dominating factor, certainly in the early part of the week.

GBP

Sterling had an eventful week, initially falling in reaction to Wall Street’s woes before recovering after the Bank of England sprang a hawkish surprise on the markets. The market, as is the MPC, remain divided over the threat of inflation, but with gas prices rising and supply chain difficulties causing shortages, it is hard not to side with the hawks. Indeed, the Bank of England itself is now forecasting inflation to touch 4% by year-end. The GfK Consumer confidence index, released on Friday, has slumped, and despite the Bank’s hawkishness, sterling is starting to look a little vulnerable. It certainly has some headwinds to negotiate with both furlough ending and the problems over the Irish protocol still rumbling in the background. The coming week hasn’t got the fullest data docket with only second-tier data scheduled apart from second-quarter GDP on Thursday.

EUR

Yesterday’s German election failed to deliver a clear winner, and the country now faces a protracted period of negotiation between all the parties. The SPD finished slightly ahead and, at the moment, look favourites to team up with the Greens and one or more of the smaller parties. Angela Merkel will stay as Chancellor until a new government is formed but, in effect, is now a lame-duck politician at a time when Germany and Europe are recovering from the pandemic and need leadership. All markets dislike uncertainty, and it now looks like that is firmly on the cards, possibly for several months. Germany releases its October Gfk Consumer Sentiment data tomorrow, followed by September’s Unemployment level and Consumer Price Index (CPI) on Thursday and Retail Sales on Friday. Usually, these would have the potential to move the euro; however, with the election overhanging the market, any reaction will be limited. The most meaningful data will be the release on Thursday of September’s Eurozone CPI forecast to rise to an annual rate of 3.4%. If it exceeds this level, inflation fears will rear their head, giving the ECB a headache and encourage the hawks in its midst. Before that, Eurozone Consumer Confidence will be reported on Wednesday. The two most influential members of the ECB, Christine Lagarde and Phillip Lane are slated to speak.

USD

The Fed made a decisive move towards tightening its policy last week, and surprisingly, the dollar did not react as strongly as expected. With the yield on US Treasury bonds increasing, the dollar should attract further fans in the week to come, especially if the stock markets start to wobble again. It is quite a busy week for data in the US, with the highlights crammed into next Friday when Gross Domestic Product, Personal Income, and the Feds favourite number, the Core Personal Consumer Expenditure deflator, are all released. Before those, we have Durable Goods to digest this afternoon, Consumer Confidence tomorrow, and on Thursday, the weekly jobless claims total. Possibly as influential for the markets will be the plethora of speakers from the Fed, including Chairman Jerome Powell, who will take to the podium twice. Treasury Secretary Janet Yellen will join him as the US debt ceiling issues continue unresolved. With month and quarter-end on Thursday and October 1st set as the date to approve a stopgap government funding limit, time is rapidly running out, and some nervous times lie ahead.

Scandi

The Swedish Riksbank kept its main benchmark rate unchanged, and Governor Ingves did not tell the market anything new after its meeting last week. The Swedish krone finished the week stronger but is still within the range it has been trading in throughout 2021. This week the latest Retail Sales figures are released on Tuesday alongside the Trade Balance, and on Wednesday, the Consumer Confidence indicator is published.

Norges Bank Governor Olsen did what the market predicted for a very long time and increased the benchmark rate by 25 basis points to 0.25. He cited the ever-improving economy in Europe’s second-wealthiest country and adjusted the rate path higher. The next hike is expected to come in December, just before Christmas. This week we are anticipating the latest unemployment figure, which is expected to have come down further to 2.5% from 2.7%.

Dollar becomes King for the time being

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Last week the markets were overshadowed by the events unfolding in Kabul and across Afghanistan. With chaos seemingly engulfing the country, investors turned tail from riskier assets and sought the safe haven of the dollar.

This change in sentiment pushed sterling down almost 1.5% whilst the euro to its lowest level for nearly a year. The UK enjoyed a mixed week of macroeconomic data, which started with better than expected employment data; however, the inflation rate was lower than forecast, as were Retail Sales. A picture of a patchy and uneven recovery in the UK emerges when the data are taken together. This is likely to stay the case for the foreseeable future as the spread of the delta variant of Covid continues. Sterling also gave up some of its recent gains against the euro to end the week nearly a cent lower as a by-product of the dollar’s strength.

Afghanistan and, in particular, any signs of America’s hasty withdrawal prompting expansionist moves from China towards Taiwan will continue to concern the market in the week ahead. Also of concern will be the spread of the Delta variant of Covid, and it will be a surprise if risk sentiment improves too dramatically. Away from geopolitical worries, one event will preoccupy traders’ thoughts, and that is the Federal Reserve’s annual economic Jackson Hole Economic Symposium starting on Friday. Until then, with many bankers and investors still preferring their sunbeds to the office desks, it will probably be a quiet start to the week, especially in the UK and Europe, as there is very little on the data docket to excite.

UK

As we said previously, sterling had a miserable week that matched the weather in the UK. And although the weather is forecast to improve, sterling is likely to remain under pressure from the dollar for a while longer. The one bright sign last week was the UK’s latest unemployment report, but with analysts and traders picking on the less than satisfactory elements, it became apparent that the markets were looking for a reason to sell sterling. This week’s domestic data is relatively thin on the ground, with the only major release being the preliminary, or flash, Purchasing Managers Indexes (PMI) released as this report reaches your inbox. The figures are likely to have been distorted by the recent pingdemic as well as supply disruption and are unlikely to move sterling too much.

EU

As with sterling, the single currency remains at the mercy of outside events. With sentiment so risk-averse, it is hard to see too much of a recovery by the euro against the dollar. However, it remains towards the bottom of its recent trading ranges and could well be slightly oversold by institutions, so it may bounce back from its current levels. The euro gained against sterling last week, but this was the dollar bossing sterling more than any euro strength. As with the UK, there is very little to get economists excited this week with just the August Purchasing Managers Indexes released today.

Apart from these, it’s all German data starting tomorrow with Second Quarter Gross Domestic Product followed on Wednesday by August’s Ifo Business climate before the week closes with the Gfk Consumer Sentiment surveys. The only spokesperson from the ECB scheduled is Isabel Schnabel, who is speaking both tomorrow and Thursday.

US

Alongside the geopolitical implications of the American withdrawal from Afghanistan, the only other event that the market reacted to last week was the release of the minutes from July’s Federal Open Market Committee meeting. The minutes were non-committal on whether earlier tapering was in order now, with “several” saying a reduction in bond purchases may be more appropriate “early next year”. This week’s key event again revolves around the Federal Reserve, with the Kansas Federal Reserve hosting, albeit remotely, the annual Jackson Hole Symposium, which starts on Friday.

With the Delta variant of Covid forcing the meeting online, the Fed may disappoint the market by choosing to hold policy steady. If this was to happen, the dollar could sell off quite sharply. Data flow starts this afternoon with the August PMIs, followed by New Home sales tomorrow and Durable goods orders on Wednesday. On Thursday, revisions to second-quarter GDP and the weekly jobless report are released. Interestingly, the data week will close on Friday with one of the Fed’s key metrics, the Personal Consumption Expenditures Price Index.

Scandi

The Swedish krona suffered as concerns about geopolitics and financial market sell-offs caused beta currencies to weaken. Moreover, PM Löfven declared on Sunday that he will step down in autumn and won’t be the leader of his party. This does not warrant a new election but will merely see another party member of the Social Democrats take the lead and prepare for next year’s General Election. We will pay attention to the Unemployment Rate on Thursday and Retail Sales as well as GDP on Friday.

The Norwegian krone continues its slide, this time caused by the ever-decreasing core inflation figure. Speculation is therefore rife that Norges Bank Governor Olsen may have to delay his rate hike given the fragility of the recovery.