Ebury: Week … ECB and Inflation in US – UK

By Enrique Diaz – Alvarez *

The euro fell to the bottom of the G10 currency rankings over the weekend amid concerns about both the duration of the war in Ukraine and the French presidential election. The massive interest in the US bond market continues, with the 10-year yielding a staggering 30 basis points per week, with the dollar reacting as expected, surpassing any major currency in the world except a handful of volatile emerging currency currencies.

The volatility of the ruble continues, and the currency is now moving at higher prices than before the Russian invasion, but it is extremely non-liquid. The Chinese yuan is proving to be a rock of stability amid uncertainty in the foreign exchange market, setting a new record in world trade, despite the Chinese economic slowdown and draconian lockdown due to COVID.

The meeting of the European Central Bank next week is expected to be crucial. The conflict between “hawks” and “pigeons” that we had predicted for quite some time has erupted, as clarified in the minutes of the previous meeting, and we expect that the announcements of the Central Bank on Thursday will reflect this, after some really difficult readings for inflation.

March inflation data is expected in the US on Tuesday and in the UK on Wednesday. It will be an unusually busy week for sterling, as the February employment report will also be released on Tuesday.

Sterling

Sterling has struggled in recent weeks following a bold rhetoric from the Bank of England, but March PMI business sentiment was strong and labor market and inflation data just as strong this week. These should restrain the currency. We expect the members of the Monetary Policy Committee to recognize the reality of a new inflation wave that is hitting an economy that is already in full force. We expect the currency to stop at a threshold at current levels as the Bank of England’s stance becomes increasingly blurred.

Euro

The first round of the French presidential election was mildly positive for the euro, as Macron appears to be heading into the second round against Le Pen in a slightly stronger position than expected. A number of bold comments from members of the European Central Bank, as well as some caustic remarks in the minutes of the March meeting on the almost incredibly optimistic inflation forecasts of its executives, which are expected to return to the target by 2023, were positive for the euro. None of this seems to have had much of an impact on the market, and all eyes are now on the ECB’s meeting next week. We believe that even a slight change of tone by the hitherto restrained chairman of the Bank, Christine Lagarde, could have a disproportionately positive effect on the common currency.

US dollar

Minutes from the US Federal Reserve meeting revealed a more aggressive than expected plan by the Fed’s giant holdings in government bonds and mortgages. Markets have continued to raise expectations for Fed interest rate hikes, and now expect interest rates to exceed 3% sometime in the first half of 2023. It will be difficult for them to be priced even more boldly by the Federal Reserve without the European Bank for Reconstruction and Development. at least to close the gap somewhat, which leads us to believe that the euro can recover soon, especially if, as we expect, Macron wins the second round of the French presidential election in two weeks.

* Chief Risk Officer of the international payment company Ebury