Currency markets need some good news

Last week saw the annual rate of US inflation climb to 6.2%, its highest for over thirty years, and the repercussions from this surprisingly high figure reached all corners of the financial markets. Yields in the bond market rose and, in doing so, increased demand for the dollar which touched its best level against the pound this year whilst the euro again languished towards the bottom of its recent range. It was little comfort to sterling sellers that it has held relatively well compared to the Japanese Yen, which traded at a 4 year low against the dollar. Also helping the dollar was the demand for a safe haven currency as stock markets fell as thoughts of an acceleration in tightening by the Federal Reserve dented sentiment. The evolving geopolitical problems in Eastern Europe between Poland and Belarus and the apparent massing of Russian troops on the Ukrainian border also helped the dollar bulls enjoy their week.

Brexit is now firmly back in both the political and financial spotlight, and the threats, empty or not, of triggering Article 16 and a possible trade war are a worry to sterling holders. The thoughts of talks ending without agreement were enough to unsettle the UK Government Bond market last week, and the outflow of cash from it exacerbated the fall in sterling. However, there were some optimistic noises from both sides of the Channel over the weekend. With politics, domestically and internationally, and inflation back on the agenda, some of our older readers may think that they have been transported back to 1980 when we last had inflation at this level. Thankfully, however, there is one key difference… the base rate is unlikely to touch 14% this time around! The week ahead will see plenty of data released, especially in the UK.

GBP

Sterling has endured a torrid time recently and again ended down on the week against the dollar and the euro. A combination of dollar strength and concerns over Brexit drove the negative sentiment, and any good news was in short supply. There is plenty of data on the schedule to occupy traders, and it will possibly shine a light on the Bank of England’s hesitancy to raise rates. Unemployment and average earnings tomorrow will be the first set of jobs data that is not influenced by the furlough scheme and, as such, should be a truer reading of the labour market that we have seen recently.

On Wednesday, October’s Consumer Price Index is released, forecast to be 4.5%, and Retail Sales is scheduled for Friday. If the employment data, average earnings and CPI beat market expectations, the pressure will grow on the Old Lady to make an unseasonal move in the base rate at its next meeting. MPC member James Haskel starts the week with a speech and this afternoon we could be in for some interesting snippets when Bank of England Governor Andrew Bailey, Chief Economist Huw Pill, Catherine Mann and Michael Saunders get an opportunity to explain their actions in front of a Treasury Select Committee. Still, after some of the bank’s recent misleading statements, it is starting to be seen as an “unreliable boyfriend” and maybe ignored.

EUR

As we said previously, the euro has continued to suffer against the dollar, and it is difficult to see it turning dramatically in the near future. The European Central Bank looks unlikely to raise rates possibly until at least the end of 2022, deterring investors. The situation on its Eastern border looks increasingly volatile and as well as this, Covid infections are rising dramatically. As with the UK, the outcome of the Brexit discussions will impact the direction of the single currency.

It may also come under pressure from a resurgent sterling if, and it’s a big if, tomorrow’s UK unemployment data beats expectations. In common with the UK, Eurozone unemployment is released tomorrow, and their Consumer Price Index is scheduled for Thursday. The European Central Bank has plenty of opportunities to talk inflationary expectations down this week, starting with Christine Lagarde, who takes to the stage today and Friday, Isabel Schnabel speaks on Wednesday and Phillip Lane on Thursday.

USD

The repercussions from the recent CPI print of 6.2% will continue this week and should underpin the dollar. Many traders are now looking for the Fed to rein in its asset purchases quicker than previously thought, especially as the President’s rebuilding plan is set to pour more liquidity into the already frothy market. Surprisingly Friday’s University of Michigan’s consumer confidence reported that it had fallen to a ten-year low, the first signs of how worried the consumer is over inflation.

The week ahead sees plenty of opportunity for members of the Fed to explain their current thinking, and they may start to lay the ground for an acceleration of the tapering programme. The jawboning from the Fed begins with John Williams, Christopher Waller and Charles Evans on Wednesday and is followed on Thursday by Williams and Evans again. The data docket starts tomorrow with Retail Sales, which is predicted to show solid growth and Industrial Production. Housing data is due on Wednesday, and as usual, the weekly jobless total will be watched on Thursday.

Scandi

The Swedish krona was one of the worst-performing G10 currencies last week. Comments from the ECB were the main catalysts, but a lot of it was technical too, after a 100% retracement from the peak in March 2020 was recorded. Today we will get the important Inflation figure. It is expected to come in at 2.7%, lower than most other European countries, but still 0.2% higher on a year-on-year basis. The latest Unemployment figure is released on Thursday.

Over in Norway, the Krone suffered a similar fate to its big brother as the euro began strengthening. This week sees no important data releases but for the GDP figure out on Friday. On a quarter-on-quarter basis, the Norwegian economy is expected to have grown 2.6%.