Ebury: Markets in the shadow of war

By Enrique Diaz – Alvarez

The European Central Bank’s unquestionably bold messages last week did not stop the euro from sinking to new lows, as worries about stagnant inflation or even worse occur. We have also seen a significant recovery in the currencies of Eastern Europe led by the zloty, as well as ongoing rallies in commodity currencies of countries far from war, such as our longtime favorite, the Brazilian real.

Economic news will continue to be secondary because it all revolves around war news, as there is a huge problem in supply chains and we expect reactions from the world’s major central banks. Next week will be the turn of the Federal Reserve. The market expectations for a rise of 25 basis points seem reasonable to us. We also expect a clearly bold message for a more aggressive policy on the part of America. We also expect more or less the same result from the Bank of England meeting the very next day.

Sterling

Very strong monthly GDP figures from the UK confirm that the economy was very strong before the shock of the war. However, sterling did not benefit, ending the week near the bottom of the G10 coin ranking. We are a little confused by this downward movement, we believe that the currency has been sold well and we see room for recovery, something that is expected to help the Bank of England meeting on Thursday. We expect the Monetary Policy Committee to raise interest rates again, and that its announcements will follow those of the FederalReserve and the European Central Bank, with an increased focus on smoothing up rising inflation amid new supply chain shocks.

Euro

The European Central Bank seems to have finally focused on restoring its inflation credibility, but for now the markets remain focused on the war threat to the European economy and the euro does not seem to be able to hold above 1, 10 against the dollar. This is currently a common struggle for all European currencies, but we believe that any significant positive news from the war could lead to a recovery of the euro against its respective currencies. Meanwhile, several speakers from the European Central Bank are scheduled for Thursday, which will add much-needed clarity to the ECB’s timetable for higher interest rates.

Dollar

February inflation in the US reached a multi-decade high of almost 8%, but at least for the first time in a long time it did not exceed market expectations. However, core inflation also rose sharply. This week the macroeconomic calendar is loose, except of course for the crucial Federal Reserve meeting. First of all, the bold messages we expect in terms of communication from the Bank are expected to work positively for the dollar. However, this correlation of the messages of Bank officials with the upward course of the currency may have weakened in the aftermath of the invasion, as shown by the failure of the euro to take an upward course last week.

* EnriqueDiaz – Alvarez is Chief Risk Officer of the international payment company Ebury.