Ebury: Week of data announcement that will show the way to central banks

By Enrique Diaz – Alvarez *

Another week of risk asset sell-offs had a predictable effect on foreign exchange markets. The Japanese yen was at the top in terms of performance last week, followed by the US dollar. The European currency has stagnated again, and commodity currencies such as the Norwegian krone and the dollar have fallen sharply. Emerging market currencies have fallen against the US dollar, but continue to be strong against the euro, indicating that rising commodity prices are still a driving force in currency exchanges.

The main concern driving the markets is the extent to which central banks can bring inflation back on track without seriously hurting growth prospects. High-frequency data, such as retail sales in the US on Tuesday, will become even more important. However, it will be a week of data announcements, and therefore messages from central bank executives will be the focus. In addition to a list of European Central Bank speakers, it is worth noting the publication of the minutes from the European Central Bank meeting in April. The announcement of the UK inflation next Wednesday will be the key for sterling.

Sterling

First-quarter GDP data released last week was milder than expected, although some details in the figures (such as strong investment, weak public and private consumption) were more positive. This week, headline inflation data is expected to move to a multi-decade high, possibly above 9%, and we will also see an increase in the key index, which is expected to move above 6%. The pound seems to have stabilized recently, at least against other European currencies. However, it is difficult to see a significant recovery against the US dollar until the Bank of England shifts its rhetoric to a more aggressive tightening. This week, it is likely that this will be done by a number of speakers among the members of the Monetary Policy Committee, although it may be too early for that.

Euro

In the absence of announcements of significant economic data, traders last week addressed issues such as gas supply and its impact on industrial production. Apart from that, the data for the general climate were not good, but we note that the most important PMI indicators continue to be maintained in the growth area. It is difficult to see high risks of recession with the composite index well above 55 (50 indicates stable performance). The change in the European Central Bank to an aggressive rhetoric has not yet helped the common currency, but we believe it is only a matter of time before it does. With a host of speakers and the minutes of the Bank meeting in April officially released this week, there may be an opportunity for a counter-euro rally.

US dollar

The US economic data released last week did not significantly change the picture of a full-time economy, which continues to grow despite supply constraints. The manufacturing and retail data released this week will provide the latest information on the health of the US economy, but it is unlikely to move the needle much. Interest in foreign exchange traders will remain in the bond and stock markets. We believe that investments in safe havens will slowly begin to be stopped by traders, and a stabilization in the stock markets could be enough for the US dollar to lose some of its recent gains.

* Chief Risk Officer of the international payment company Ebury