Hold Onto Your Hats!
It was a brutal week in the currency markets with both sterling and the euro suffering heavy falls in the face of the soaring dollar. With the war in Ukraine showing no sign of letting up, possibly even intensifying, the dollar’s safe-haven was in demand all week. Investors were also rattled by China’s handling of its latest outbreak of Covid, leading to yet more supply chain bottlenecks and some sabre-rattling by the Peoples Republic over the Solomon Islands. These factors, combined with Elon Musk’s proposed financing of his purchase of Twitter, unnerved investors in equities, which led to a further souring of risk sentiment. Set against the sure-fire certainty of a rise in rates from the U.S. Federal Reserve this week, it became one-way traffic for the greenback, with a month-end shortage of dollars adding to the buying stampede.
After such a volatile period, one could reasonably expect some let-up in activity but looking at the financial calendar, there looks scant hope for this to happen. Putting aside further developments in the geopolitical world, there is more than enough to keep investors and traders occupied in the next seven days. After a period where domestic politics were the only newsworthy distractions in the U.K., the financial world is back in the spotlight this week with the monthly meeting of the Bank of England’s Monetary Policy Committee on Thursday. Before the Bank of England meets, the Federal Reserve will hog the limelight when the monthly meeting of the rate-setting Federal Open Market Committee concludes on Wednesday. Despite nervy markets the Fed will hike borrowing costs by 1/2 % for the first time since the turn of the century. As if these two events were not enough, the week finishes with the all-important Non-Farm Payroll data release from the U.S. Labor Department.
Over the last week of April, the pound shed nearly seven cents against the dollar before finding a modicum of support as traders booked profits. Its fall came primarily from dollar strength, evidenced by its much smaller move against the euro, where it actually ended the week better than it started. The catalyst for sterling’s heavy drop was the poor set of retail sales figures, released the week before last, which cast doubt over the Bank of England’s willingness to carry through with its proposed base rate move this Thursday shortly after noon. Money Markets reined in their forecasts from .5% to .25%, which put sterling under pressure in the face of a determined Federal Reserve. Geopolitics, of course, is playing a role, as does the dollar being the safe-haven currency of choice. Domestic politics will also come to the fore this week, with local elections on the same day as the Bank of England will probably raise rates. With the economy slowing sharply, the Old Lady would probably prefer not to increase borrowing costs. Still, with inflation touching 7%, they have little or no option to increase base rate, as even Chancellor Rishi Sunak has acknowledged. However, they have a choice of how much to raise by with another quarter-point rise whilst they cross their fingers and hope for the best being the most likely outcome. Apart from the Bank of England meeting, Manufacturing Purchasing Managers Indexes are published tomorrow and their Services and Composite PMIs on Thursday morning. The week ends with no less than three speeches delivered by Bank of England’s policymaking committee members, Catherine Mann, Huw Pill and Silvana Tenreyro.
Along with most other currencies, the euro had a torrid week against the mighty dollar as risk sentiment, and the eurozone’s dependency on Russian energy supplies took their toll. It also performed poorly against sterling as the euro’s post Macron re-election bounce became a distant memory. During the week, the euro plummeted to its lowest level against the dollar since 2017 before recovering slightly. With the war in Ukraine intensifying and Gazprom halting exports to European countries, seemingly randomly pushing energy prices higher, the euro will remain under fire. It is also being damaged by the disruption to food and fertiliser exports from Russia and Ukraine leaving the European Central Bank(ECB) trapped between a rock and a hard place. The ECB would like to raise interest rates at the end of the summer and has said as much, but it may be unable to in the face of a potentially rapidly slowing economy. The week ahead will see the ECB’s interest rate policy come into focus as both the Fed and the Bank of England move rates higher. Compared to the U.K. and the U.S., there is not a lot on the financial data docket this week, with the focus on German and E.U. March Retail Sales, both seen up by a modest amount. Also on the agenda are the Markit Services and Composite Purchasing Managers Indexes tomorrow. Some notable speakers are scheduled this week, including the ECB’s chief economist Phillip Lane on Thursday and the hawkish Joachim Nagel on Friday.
After its rapid ascent, it was no surprise that the dollar paused for an intake of breath last Friday. Traders will certainly need all of their energy for what promises to be an exceeding volatile trading week ahead. Despite the apparent slowdown in economic activity as witnessed by last week’s negative Gross Domestic Product, the Federal Reserve will still move its Fed Funds rate level up by at least .5% on Wednesday. The recent GDP data may dampen enthusiasm for a punchier rate rise of .75%. Still, given inflation is running at 40-year highs and unemployment is at a historically low level of sub 4%, it cannot be ruled out. The Fed will also formally announce the commencement of a plan to rapidly shrink its bloated balance sheet. As the Fed tightens, it will highlight the policy divergence between itself and other central banks, notably the European Central Bank. This should lead to a further appreciation of the dollar; however, it has come a very long way in a short time, and traders will no doubt be mindful of the adage “buy the rumour sell the fact”. Also scheduled for publication this week are the monthly run of employment data with ADP’s white-collar data on Wednesday, weekly employment on Thursday and Non-Farm Payroll on Friday.