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The Federal Reserve determined last week that the U.S. economy has reached full employment and inflation is now the biggest problem. Priority is given to bringing inflation down.
Focus will continue to be on central banks this week. Both the ECB and the Bank of England will meet on Thursday. The latter is expected to raise interest rates again, to 0.5%. Markets will look for signs in Lagarde's statements, which have so far been dovish, that she is starting to shift and backtrack on its promise not to raise rates before 2023. It's going to be a very busy week, with January eurozone inflation on Wednesday and the December US jobs report on Friday. Below is the main currency in detail.
The ECB is a lone dissident, the only major central bank that remains dovish. This approach will be put to the test again at Thursday's meeting. The trade will scrutinize any statement made by President Lagarde to see if persistent inflation in the eurozone has changed its mind. Prior to the meeting, January's flash inflation figures will be published. We expect a limited decline in inflation levels as a VAT increase in Germany in 2020 is excluded from the annual comparison. We expect the upward trend to continue and the data will still be well above the ECB's own forecasts.
With the continued support of its own central bank, which is relatively hawkish, the British pound managed to withstand the pressure of the dollar quite well last week. Markets are already expecting a full 1% of rate hikes this year. We expect the first tranche of this next Thursday at the Bank of England meeting, in the form of a 0.25% rate hike. There will also be due attention to the consequences of the allegations against Boris Johnson's government, which is alleged to have breached its own coronavirus rules, but we still don't think this will have much impact on the FX markets, even if the prime minister were to be replaced.
The Deral Reserve has identified all the reasons for a fairly aggressive tightening of monetary policy next week: a full-employment economy, strong demand, and rapidly rising inflationary pressures. More importantly, the Fed has also opened the door to even more aggressive rate hikes than the market is currently pricing in, if the new data warrants it. This week's focus will be on the jobs report, but we're inclined to leave those numbers out of the equation. The disruption caused by Omicron may result in a deceptively weak number, but in our view, both markets and the Fed will look beyond this number. We will have to wait for the post-Omicron figures for February.
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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