Ebury: Central banks and inflation back in focus

By Enrique Diaz – Alvarez *

In the financial markets. Inflation and central banks have once again overshadowed geopolitical developments and foreign exchange markets are no exception. Of the G10 currencies, the Japanese yen and the Swiss franc, which are considered transitional safe havens, rose against the US dollar. It should be noted that commodity currencies such as the Australian and New Zealand dollars did quite well, as commodity prices show resilience to safe flight flows. As expected, the currencies of Eastern Europe had the worst performance, as they were swept away by bad news from the crisis in Ukraine.

The main macroeconomic announcements expected this week are the PMI indicators of business activity in the USA, the Eurozone and the United Kingdom. However, the geopolitical crisis in Ukraine is likely to overshadow them. It is not yet clear what impact a full-blown exchange rate would have on the euro-dollar exchange rate. While the dollar has traditionally been a safe haven in times of crisis, the ensuing rally in US bond yields would likely neutralize one of the pillars supporting the recent dollar rally.

Sterling

Despite the relentless rise in inflation, almost every relevant report from a major economic area has exceeded expectations. The United Kingdom last week was no exception. The nominal interest rate set a new multi-decade record at 5.5%, with the key interest rate at 4.4%, signaling that inflationary pressures are spreading. The employment and retail sales report also surprised upwards, giving support to hawks in the Bank of England and hence to sterling, which held fairly well despite the geopolitical deterioration. In addition to business PMIs, this week’s financial calendar is very busy, with at least six members of the Bank of England’s Monetary Policy Committee scheduled to speak in public.

Euro

As European Central Bank President Christine Lagarde continued to be modest about expectations for growth in the eurozone, Lane’s chief economist appeared to back down last week, finally acknowledging that the deflating environment was slowing down. come back. Next week’s PMIs may be overshadowed by the first data on February inflation from France, which are almost certain to show further sharp increases. There is still plenty of room for markets to discount a faster growth program from the ECB, and we expect that in any case the single currency will have support.

US dollar

This week will be slightly poorer in terms of data release from the US, as only the announcement of PMIs and PCE inflation is expected. The focus is expected to remain on geopolitical titles on the one hand and public statements at the US Federal Reserve on the other, and five members are scheduled to take public positions during the week. We expect the uncertainty about the reaction of the dollar to a possible worsening of the crisis described above to be reassured soon. In contrast to other major economic regions, especially the eurozone, it will be difficult for US interest rates to rise much faster than they already do, so there is room for a partial easing of the dollar rally against the euro.

* 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.