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The ECB's message last week was clearly 'hawkish', but that didn't help: the euro slipped to new lows on rising concerns about stagflation and worse. There was a decent rebound in Eastern European currencies, led by the zloty, and commodity currencies of countries far from the war continued to rally. One of those currencies was the Brazilian real, which has been our favorite for a while.
Economic news will also be pushed into the background this week by the news about the war and the reaction of the major central banks to the new supply shock. This week, it's the Fed's turn. The market expects a rate hike of 25 basis points, and that seems right to us. We also think the message will be unmistakably hawkish, as the Fed is seriously behind the curve. This also applies to the Bank of England, which meets the next day. Below is the main currency in detail.
The ECB finally seems to want to restore its credibility on inflation, but markets remain focused on the war, which is a threat to the European economy. The euro does not seem to be able to move above the level of 1.10 against the dollar. At the moment, the exchange rate of all European currencies is difficult, but if there is significant positive news about the war, we believe a rebound in the oversold common currency is possible. Next Thursday, the public appearances of several ECB representatives will hopefully provide more clarity on what timeline the ECB has in mind for interest rate hikes.
The monthly GDP figures from the UK were very good, confirming that the economy was very strong before the shock of the war. However, the British pound did not manage to benefit from this: the currency ended the week at the bottom of the G10 rankings. We're a little surprised at this move downwards. The pound is likely oversold and we see room for a rebound. The Bank of England's meeting next Thursday should give the currency a push in that direction. Given the new supply shocks, we expect the MPC to raise rates again and to put more emphasis on dampening rising inflation in the announcements, as did the Fed and the ECB.
In February, inflation in the US rose to almost 8% – again the highest in decades – but for the first time in some time, it did not exceed market expectations. However, core inflation also rose sharply. There isn't much on the macroeconomic agenda this week, apart from the crucial Fed meeting, of course. We expect the communication to be 'hawkish'. In principle, this should be good for the dollar, but this correlation seems to have weakened since the invasion, as the euro did not rally last week.
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.
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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.
