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Last week, the currency rankings were surprisingly led by the Swiss franc. The Swiss National Bank joined other hawkish central bankers in surprising markets with a 50 basis point rate hike. No interest rate hike was expected at all, so the exchange rate of the Swiss franc immediately soared against all other currencies. The prices of risk assets fell sharply around the world. The effect of this on currency exchange rates was mixed. An emergency meeting of the ECB calmed the peripheral bond markets, after which the euro managed to hold up well against the dollar. Emerging market currencies performed mixed last week. Some prices rose, others fell – there was no clear line.
Now that we have the meetings of the leading central banks behind us, markets will turn their attention to key and consistent macroeconomic data. They will want to know how realistic the recession fears are that are alive in the stock markets. Thursday will be an important day in this respect, as the eurozone, the UK and the US will release the PMI indicators for economic activity. Especially in the eurozone and the UK, these figures will make a lot clear. We expect them to continue to point to economic growth in all three economic zones. This could reduce recession fears. Below are the main currencies in detail:
The ECB held an emergency meeting in response to the sharply rising spreads between peripheral sovereign debt and that of core countries. This calmed the markets, despite the fact that they were not specific. A temporary floor has now been put under the exchange rate of the single currency, but we expect that the markets will soon demand more concrete information. For example, there is an urgent need for more clarity on the promised instrument to combat fragmentation. Perhaps that clarity will be provided by ECB representatives during their public appearances this week. The preliminary PMIs could put an end to immediate fears of contraction on Thursday. This could give the exchange rate of the euro a push up. Below are the main currencies in detail:
The Bank of England had another change of course to offer investors at its meeting last week. The interest rate hike was expected by most, but there were three 'hawkish' dissidents and no pigeons. The MPC's announcements have become hawkish and the main aim is to react flexibly to inflation surprises. Rate hikes of 50 basis points are not ruled out – if necessary. The British pound reacted well to this news. Although the price development started to falter a bit on Friday, the currency still closed the week higher against the US dollar. This week, we will not only get the important PMIs, but also the May inflation report. If inflation hits a new record, markets could price in more Bank of England rate hikes. This can strengthen the pound – which is a bit paradoxical, of course.
The Federal Reserve responded to the previous week's inflation surprise with a massive 75 basis point interest rate hike. This is the first in three decades, and the message is clearly hawkish. Equity markets and risk assets generally reacted as you would expect (i.e. negatively). The dollar, on the other hand, performed in a mixed manner and failed to mount a convincing rally. In the U.S., PMI indicators tend to have less impact on the market than elsewhere. The market will focus heavily on Fed Chair Powell's annual testimony before the U.S. Congress on Wednesday and Thursday. We expect Powell to elaborate on how much the Federal Reserve intends to curtail economic activity in order to bring inflation back to target.
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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.
