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Last week we saw that an interesting theme was continued. Emerging market currencies held up even as developed market equity markets struggled due to risk avoidance.
The Federal Reserve's meeting on Friday will be the most important moment of the week. Almost the entire world expects the FOMC to announce a hike in March and possibly an early end for stock purchases. The PMI, the main indicator for business activity in the Eurozone and the UK, will be released on Monday and will show the impact of Omicron on the economy. Finally, it is expected that many eyes will be on news from Ukraine. Below is the main currency in detail.
We see that there is a significant dividing line developing in the Governing Council of the ECB. The Council is becoming increasingly unsure of the optimistic forecasts of a rapid recovery to 2% inflation and there are differences of opinion on the quantitative easing programme. On the other hand, President Lagarde seems to be sticking to his 'dovish' view on inflation and the outlook. We suspect that the ECB's inflation forecasts will be implausibly optimistic. The gap in the Governing Council is expected to widen and eventually, before the end of the year, lead to a rise at the ECB, which will give the euro the wind in its sails.
The pound's recovery was paused last week by light economic news from the UK and a general trading atmosphere that avoided risks. Still, December's significant and surprising inflation rate is by no means a guarantee of a rise at the Bank of England at the February meeting. We look forward to the January PMIs due out on Monday to confirm that the effect of Omicron on the UK economy is visible as all three indexes continue to grow. We suspect that the easing previously announced will provide enough impetus for a positive development to allow the pound to start this week strong.
Expectations for market gains in March for the Fed held up last week, even with all the risk avoidances and lower yields in the U.S. Treasury. With the exception of market volatility, there has been little news from the U.S. last week. The Federal Reserve's January meeting on Wednesday will be a major event for currency markets. Not only is there a clear signal that a hike is on the way in March, we also suspect that an announcement will be made to start the quantitative easing program ahead of schedule. The actual impact of such a change would be small, but the psychological effect of such a 'hawkish' signal cannot be predicted. Therefore, we believe it is more likely that the program may not go according to plan, although we expect "hawkish" communication from the Federal Reserve in the meeting.
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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