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The euro ended at the bottom of the G10 rankings last week. This was due to concerns about the war in Ukraine, which does not seem to be ending anytime soon, and nervousness about the French presidential election. The carnage in the U.S. bond market continues. Ten-year Treasury yields rose by a breathtaking 30 basis points last week. The dollar reacted as expected, leaving every major currency in the world (except for a few volatile emerging market currencies) behind. The ruble remains volatile and is now higher than it was before the start of the Russian invasion. However, the coin is extremely illiquid, which means that market quotations have virtually no meaning anymore. The Chinese yuan is proving to be a rock in the midst of all the uncertainty in the currency markets. Despite the stagnation of the Chinese economy and the draconian corona lockdowns, the currency reached trade-weighted new all-time highs.
This week's ECB meeting promises to be crucial. The conflict between the hawks and doves, which we had predicted for some time, has erupted. This is clear from the minutes of the previous meeting, and we expect that the bank's announcements next Thursday – after some very nasty inflation figures – will also point to this. In the US and the UK, March inflation figures will be released (Tuesday and Wednesday, respectively). It will be an exceptionally busy week for the British pound, as the February employment report will also be released on Tuesday. Below are the main currencies in detail.
The first round of the French presidential election was fairly positive for the euro, as Macron enters the second round against Le Pen from a slightly stronger position than expected. There was more positive news for the euro: ECB members made hawkish remarks everywhere, and the March minutes included some scathing comments about the ECB's almost unimaginably optimistic inflation forecasts, which predict that inflation will return to target levels in 2023. None of these events seem to have had much of an impact on the market. All eyes are now on this week's ECB meeting. Even the slightest change in the tone of Lagarde, who has so far remained dovish, could, in our view, have an outsized positive impact on the single currency.
The pound has struggled in recent weeks following the Bank of England's dovish statements, but the extremely strong March PMIs and labour market and inflation data – which we believe will also be very strong – are likely to put a floor under the price. We believe that the members of the MPC will face the reality that the economy, which is already operating at full capacity, is being hit by a new wave of inflation. We expect the cable (the GBP/USD currency pair) to hit this bottom around current levels as the Bank of England's stance becomes increasingly unsustainable.
The minutes of the Federal Reserve's meeting made it clear that the plans for the reduction of the gigantic holdings of government bonds and mortgage bonds are more ambitious than expected. Markets continue to raise their expectations for the Fed's rate hikes. At the moment, an interest rate of more than 3% is expected sometime in the first half of 2023. Without some narrowing of the gap by the ECB, it will be difficult to price in even more hawkishness from the Fed. We therefore believe that the euro could soon make a 'rebound', especially if Macron wins the second round of the French presidential election in two weeks' time, as we expect.
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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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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here to subscribe.
