E-bury: Possible serious volatility in the foreign exchange market

By Enrique Diaz – Alvarez

The dollar’s explosive rally accelerated last week as markets voiced their expectations for US Federal Reserve (FED) interest rates, while “aggressive moderately” announcements by the European Central Bank hit the euro. The policy of the Central Bank has become the main lever in the foreign exchange markets, while regarding other news, if we exclude the expectations of influence that will arise in interest rate increases, we have nothing else remarkable. Special mention will be made of the pound sterling, which outperformed most other currencies, ending the week almost flat against the US dollar, and the Turkish lira, which was by far the worst-performing currency as Erdogan forced his central bank to cut interest rates as the currency is sold out by locals in a panic.

Although Thanksgiving is upon us, it’s time to dump her and move on. The US Treasury will sell an unusually large number of bonds at auction, and it is unclear whether the crucial bond market will easily absorb this massive bid after the recent sell-off of bonds and aggressive statements by Federal Reserve officials. President Biden is expected to announce his candidacy for the presidency of the Federal Reserve before the holidays, and the PCE inflation report will be published on Wednesday. The Eurozone Business Activity Indices for November are published on Tuesday and will be the first reading of the impact of recent COVID news on business confidence. The week full of news, combined with the lower liquidity associated with the holidays in the US could cause some serious instability.

Sterling

Sterling managed to achieve a stable week against the US dollar, which means that it rallied against the rest of its G10 counterparts and almost every other major currency in the world. Positive news from retail and the labor market boosted expectations of a rise in interest rates before the end of 2021, in stark contrast to the ECB’s sluggish policy of timidity. PNI (Performance Indicator Charts) reports and public statements by members of the Bank of England Monetary Policy Committee this week are expected to support such expectations, which gives us a pretty positive outlook for the pound sterling from now on. until the end of the year.

Euro

The euro continues to fall sharply both due to the European Central Bank’s setback against expectations of higher interest rates and due to the negative atmosphere caused by another series of lockdowns due to the pandemic. The PMI announcements this week will include some of the impact on business confidence and thus will be closely monitored by the markets. The flow of news has not been favorable to the common currency, but the brutal sell-off in recent weeks seems excessive, which means it could catch on if the ECB’s statements do not sound too worrying about the pandemic situation.

US dollar

US Federal Reserve officials made loud statements late Friday, signaling that interest rate cuts could accelerate, and signaling that the Federal Open Market Committee is increasingly concerned about inflation data. In addition to PCE (Personal Consumption Expenditures) inflation data on Wednesday, just before the holidays, government bond auctions on Monday and Tuesday will be the key to measuring market sentiment against a further massive increase in US debt, reduced support from the Federal Reserve and massive negative interest rates. The minutes of the last meeting of the Federal Reserve and the decision of US President Joe Biden for its next president, (where he is expected to choose either the current President Powell or a new one, Brainard), will complete an unusually full calendar just before Thanksgiving.

* Enrique Diaz – Alvarez is Chief Risk Officer of the international payment company Ebury. The company’s analysts were named by Bloomberg in the first place of the most successful forecasts for the EUR / USD exchange rate in the fourth quarter of 2020.