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Interest rates are rising sharply and rapidly everywhere. Markets can hardly ignore the consequences of this. In equity markets, the Fed's 50 basis point rate hike led to a relief rally, but it didn't last long. Already the next day, the downward trend was back. Equity markets ended the week at their lowest level since late 2020. The dollar and – less predictably – the euro in particular benefited from the flight to safety. In the case of the euro, this was due to the fact that the ECB finally seems to be abandoning its aim to ignore the reality of inflation.
This week, the focus will be on inflation in the US in April. Any sign of a new spike in inflationary pressures could trigger a sharp countertrend in the form of a sell-off in the dollar and interest rates. Both have been on the rise for a while now. The euro could be further supported by the hawkish comments of ECB representatives, who are starting to realise how far behind the curve they are now. Below is the main currency in detail.
The euro bucked the general currency trend last week and even managed to make some gains on the US dollar. This was no doubt due to the statements of ECB representatives, who all pointed out that an interest rate hike in July is in the cards and that this possibility also exists in June. Market positioning also played a role. It is becoming increasingly overextensive, the euro is now seen as a 'one-way bet' and investors are increasingly short. We expect ECB representatives, including President Lagarde, to reiterate this on Wednesday. This could contribute to a stabilisation of the euro.
The Bank of England once again came up with a negative surprise for the British pound. As expected, interest rates were raised last week, but the message was extremely bleak: there will be stagflation in the UK, inflation will rise further and the country will enter a recession later this year. The value of the pound fell sharply and the currency ended the week far below the list of major currencies. This is in stark contrast to the stability of the euro. In our opinion, the message was too negative. This week's GDP numbers should still be fairly positive, which should support the pound. It is now the cheapest G10 currency, perhaps after the Japanese yen.
For a moment, there was relief among the markets: Chairman Powell seemed to take a 75 basis point rate hike off the table for the time being after the Federal Reserve meeting on Wednesday. However, the prices of risk assets and US Treasuries soon went in the opposite direction. They resume their sharp sell-off the very next day. Most technology stocks and favorite speculative stocks took a beating for the rest of the week. Friday's jobs report contained the same message as the jobs reports of recent months: there is (almost) full employment in the U.S., an increase in the labor force will no longer yield anything, and wages are still lagging behind prices. The latest report should be more or less a glimmer of hope for the Fed. If next Wednesday's CPI report hints at any indication that price pressures are peaking (as markets expect), then government bond markets may be able to catch their breath and the dollar's ongoing rally could falter.
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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.
