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The main macroeconomic releases this week are the preliminary PMI indicators for economic activity in the US, the eurozone and the UK. However, these are likely to be overshadowed by the geopolitical crisis in Ukraine. It is not yet clear what will happen to the euro-dollar exchange rate if the conflict really erupts. The dollar has traditionally been a safe haven in times of crisis, but a rally in US yields was likely to occur, which would partly remove the ground from under the feet of the recent dollar rally. Below are the main currencies in detail.
ECB President Lagarde continues to try to temper expectations about interest rate hikes in the eurozone. Her chief economist Lane seemed to reverse his extremely "dovish" view last week and finally seemed to recognize that the deflationary environment of his teenage years may never return. The PMI data may be overshadowed by France's first flash estimate of inflation in February. There will almost certainly be sharp increases. Markets still have plenty of room to price in faster rate hikes by the ECB. We expect the single currency to remain well supported as long as this happens.
In almost every inflation report from major economic areas, the figures exceeded expectations – even though the latter have continued to rise.
This was also the case in the UK last week. The headline figure crept up to 5.5%, a new record in many decades. The core figure came in at 4.4%, which was not much behind. This indicates that inflationary pressures are spreading. The employment report and retail sales were also upside surprises. This strengthens the 'hawks' at the Bank of England – and with it the British pound, which has held up quite well despite the deteriorating geopolitical situation. In addition to the PMI indicators for economic activity, the Bank of England also has an unusual number of speeches on the agenda, with six members of the MPC scheduled to speak this week.
In the US, there are relatively few data on the agenda this week: only the PMI indicators and PCE inflation. We expect attention to remain focused on the news surrounding the geopolitical situation on the one hand and on the Federal Reserve's announcements on the other. Five members of the Fed want to give a speech this week. Hopefully, it will soon become clear how the dollar reacts to a possible escalation of the crisis described above. In the US, unlike in other major economic areas (especially the eurozone), it will be difficult to price in even faster rate hikes. This means that the dollar's rally against the euro could be partially reversed.
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:
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