Ebury: Macroeconomic and geopolitical crisis bring instability to markets

By Enrique Diaz – Alvarez

Instability has returned triumphantly to the markets so far in 2022, as macroeconomic and geopolitical crises continue to affect them. The January inflation report in the US caused another shock to investors, far exceeding the estimates for 7.5% on an annual basis. Fixed income markets worldwide sold out, but the impact on foreign exchange markets was less pronounced. Emerging market currencies have actually rallied, in contrast to the experience we have from previous Federal Reserve interest rates. The news of a possible worsening of the crisis in Ukraine, which hit the markets late on Friday, only partially restrained the mood, with the Brazilian real leading the way in the ranking of the week, followed by other Latin American currencies. In the G10, commodity currencies such as the Australian, New Zealand and Canadian dollars also performed better, as markets concluded that the conflict in Ukraine could indeed further increase commodity prices worldwide.

It seems that the latest inflation shock has brought some kind of turning point to the US Federal Reserve. James Bullard, a member of the Federal Open Market Committee, said the situation now favors interest rate hikes even without scheduled meetings, something that has not happened since 1979. In the near future, markets will focus almost exclusively in two factors: inflation and the central policy of the Bank. As for the first, the announcement of the US inflation and the UK Consumer Price Index is expected on Tuesday this week. For the CPI, speeches by five Federal Reserve executives are expected, as well as ECB President Lagarde and Chief Economist Lane. In addition, the minutes from the last meeting of the Federal Reserve will be made public on Wednesday, although it should be noted that they come with a delay of three weeks.

Sterling

The main news from the United Kingdom is that GDP growth seems to be holding up, growing by 6.5% year on year in the last quarter of 2021, which seems to leave an open path for the “hawks” in the Bank of England. The news from the US is definitely expected to strengthen them, as the need to control inflationary pressures becomes a priority for policymakers worldwide. Downing Street’s “Partygate” continues to have no significant impact on markets, which will focus fully this week on the UK Consumer Price Index inflation report. The forecast is for the same or slightly higher prices than last month, but the recent history of positive surprises in global inflation is sure to keep traders traders in a frenzy.

Euro

European Central Bank President Lagarde’s ongoing efforts to dampen market expectations for interest rate hikes have failed as tensions in Ukraine plunged interest rates late Friday night. It seems that the markets are now expecting increases of 50 basis points for 2022, but with a final growth rate of only 0.7%, which is considered completely insufficient given the intensity of inflationary pressures. This week there are few factors to drive the markets. Emphasis will be placed on the public speeches of the heads of the European Central Bank, President Lagarde and the Chief Economist Lane. Any indication in their speech about the inflationary reality would work positively for the common currency.

US dollar

The January inflation report was another shock, reaching 7.5%, another 40-year high. Even more worrying is the fact that price increases are spreading widely. Of particular concern is the spread of pressure on house prices, something that is not expected to ease any time soon. US yields rose sharply, but part of the gains were lost due to news that the US believes a Russian invasion of Ukraine may be imminent. We expect producer prices to fall slightly next week. Most importantly, there are many speeches by Federal Reserve officials. We expect that they will confirm the growing concern about inflation and suggest to the markets a possible rise in interest rates in each session and even more than 25 basis points, unless inflation figures begin to decline significantly.

Enrique Diaz – Alvarez is Chief Risk Officer at 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.