The euro finished at the bottom of the G10 ranking last week. This was due to concerns about the war in Ukraine, which does not seem to end in the short term, and nervousness about the French presidential election. The slaughter in the US bond market continues. Ten-year Treasury yields rose a staggering 30 basis points last week. The dollar reacted as expected, leaving behind every major currency in the world (except for a number of volatile emerging market currencies). The ruble remains volatile and is now higher than before the start of the Russian invasion. However, the currency is extremely illiquid, which means that market quotations are practically meaningless. The Chinese yuan turns out to be a rock in the surf among all the uncertainty in the foreign exchange markets. Despite the stagnation of the Chinese economy and the draconian corona lockdowns, the currency reached new record highs weighted by trade.
This week’s ECB meeting promises to be crucial. The conflict between the Hawks and pigeons, which we had predicted for some time, has erupted. This is clear from the minutes of the previous meeting, and we expect that the bank’s announcements next Thursday – after some very bad inflation figures – will also point to this. In the US and UK, March inflation figures will be announced (on Tuesday and Wednesday, respectively). For the British pound, it will be an exceptionally busy week, as the February employment report will also be published on Tuesday. Below the main currencies in detail.
The pound has had a pretty tough time in recent weeks following the Bank of England’s’ dovish’statements, but the extremely strong PMIs of March and the labour market and inflation figures – which we also believe will be very strong – are likely to put a bottom below the course. We believe that the members of the MPC will face the reality that the economy, which is already running at full capacity, is being hit by a new wave of inflation. We expect the ‘cable ‘ (the GBP/USD currency pair) to hit this bottom around current levels as the Bank of England’s stance becomes increasingly unsustainable.
The first round of the French presidential election was fairly positive for the euro, with Macron entering the second round against Le Pen from a slightly stronger position than expected. There was even more positive news for the euro: ECB members made ‘hawkish’ comments everywhere, and the march minutes contained a number of scathing comments about the ECB’s almost unimaginably optimistic inflation forecasts, which predict that inflation will return to target levels in 2023. None of these events seem to have had much impact on the market. All eyes are now on this week’s ECB meeting. Even the slightest change in Lagarde’s tone, which has so far remained ‘dovish’, could, in our view, have an excessively positive effect on the single currency.
The minutes of the meeting of the Federal Reserve made it clear that the plans for the phasing out of the giant holding of government bonds and mortgage bonds are more ambitious than thought. The markets continue to raise their expectations for the Fed’s interest rate hikes. At the moment, an interest rate of more than 3% is expected somewhere in the first half of 2023. Without any narrowing of the gap by the ECB, it will be difficult to praise even more hawkishness of the Fed. We therefore believe that the euro could soon make a’ rebound’, especially if Macron – as we expect – wins the second round of the French presidential election in two weeks ‘ time.