All eyes on the US Federal Reserve

Risk sentiment gradually worsened last week, and as it did, the dollar became more attractive to investors leading it to close broadly higher on Friday. Sterling also had a good week, ignoring the trials and tribulations that Boris Johnson is undergoing instead focusing on the ending of Plan B Covid restrictions. Markets are becoming increasingly aware that the period of easy money that they have been enjoying since the start of the pandemic is ending. Central banks, particularly the US Federal Reserve, are now worried by the recent jump in inflation and the asset bubbles that they have caused. With midterm elections looming in the US, pressure is on the Federal Reserve to act sooner rather than later. The Bank of England is also concerned by inflation, with Catherine Mann, the newest member of its Monetary Policy Committee, saying that it may stay “stronger for longer” in a speech on Friday. With the recent rise in the Consumer Price Index in the UK and with unemployment not rising as sharply as some had predicted, the chances are that the Old Lady will raise rates next week.

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 ”partygate“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.

Scandi

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%.