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It's a somewhat curious development: U.S. Treasury yields continue to rise and the market is pricing in a faster cycle of interest rate hikes by the Federal Reserve, but the dollar has struggled so far in 2022.
This week, too, sentiment in the financial markets and financial news will be driven by inflation news – including from the UK (Wednesday) and Japan (Friday). In addition, a whole series of central bank meetings are on the agenda. There won't be that many new data coming out of the US and the eurozone this week. However, the market will listen carefully to an important speech by ECB President Lagarde on the global economic outlook on Friday. It is expected to address growing doubts among markets about whether the ECB can afford to wait until 2023 to raise interest rates in the face of the global inflation wave. Below is the main currency in detail.
There were virtually no significant economic data last week. The exchange rate of the euro hovered against the dollar, as did the other G10 currencies. There is not much on the agenda this week either, with one major exception: ECB President Lagarde's plenary session next Friday, on the global outlook. The gap between Lagarde's dovish stance and inflation data and market expectations is widening by the week. We expect it to take this opportunity to address this and clarify the ECB's view on future rate hikes. We think trading around this event will be volatile.
The political turmoil surrounding Boris Johnson's staff party during the first lockdown was largely ignored by the markets. They preferred to focus on the strong GDP figures. Interest rate futures are already pricing in the Bank of England to raise rates four times over the course of 2022, and this is also the main explanation for the British pound's breathtaking rally so far this year.
In the UK, many key figures are being published this week. Markets will focus on inflation data, with the headline figure expected to be above 5.0% again. The labour market report will also receive due attention, but it will be overshadowed by the short-term effects of the restrictions imposed in connection with the Omicron variant of the coronavirus.
Expectations for inflation in the US are being raised, but the actual figures are rising even faster. The headline figure for December was 7%, the highest figure in decades, closely followed by the core figure at 5.5%. There is not much agenda in the US this week either. The Fed will enter a period of rest until the January 26 meeting. The news of 2022 so far is that the dollar rate is no longer linked to expectations for interest rate hikes. The market is now expecting more rate hikes than in 2022, but the dollar's price movement against its main counterparts is still difficult.
By: Enrique Diaz-Alvarez
Enrique Diaz-Alvarez is chief risk officer and heads Ebury's analyst team in New York. Because of his drive, passion and thorough knowledge, Enrique is recognized by Bloomberg as one of the most accurate predictors of market movements.
About Ebury:
Ebury Makes international markets more accessible with tailor-made foreign exchange services and flexible trade credit for businesses. Ebury works with more than 12,000 organisations and carries out €12 billion in foreign exchange transactions in 140 different currencies. The company has offices in the United Kingdom, the Netherlands, Spain, and Poland. Ebury's priorities:
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