‘Forcefully if needed’

GBP

Crucial decision ahead

Last week was another mixed one for Sterling; while the Pound climbed against Scandinavian currencies and rose to close 0.47% higher versus the Euro, it tumbled to fresh multi-year lows versus the US Dollar, closing over 2.0% lower. Recent UK manufacturing and retail sales data have produced readings that could signal the start of a spending slowdown as inflation continues to rise. This week, markets will be watching closely on Thursday as the Bank of England’s highly anticipated interested rate decision comes into focus. Currently, expectations are set for the central bank to raise the current interest rate from 0.75% to 1.00%—the highest level it’s reached in 13 years. It could spell trouble for Sterling if the BoE decision disappoints, as markets have already priced in future hikes off the back of these expectations for the May meeting. Meanwhile, UK house prices are forecast to have continued to rise in April, and several BoE policymakers will be speaking on Friday to close out the week.

EUR

Euro sinks against the US Dollar

It was a tough past week for the Euro, which weakened against most other G10 currencies as US Dollar strength dominated. The Euro to US Dollar exchange rate closed April 4.85% lower than it began the month, recording its worst monthly performance since January 2015. Year-to-date, the EUR/USD currency pair has fallen by almost 7.0%. A lot of Euro weakness has come from the differing approaches to monetary policy across the world. While the Federal Reserve in particular has been more aggressive with its tightening, the European Central Bank has been lagging behind. However, there are signs the ECB is considering upping its game, and recent comments from one Governing Council member suggest there could be two interest rate hikes in the Eurozone by the end of the year. Rampant inflation is another global issue at the moment; Italy has just introduced a large €14bn support package in a bid to help families facing the energy crisis. In the week ahead, Eurozone Retail Sales for March could signal how sentiment in the currency bloc is faring, and ECOFIN and Eurogroup meetings have taken place today.  

USD

Hawkish bets on the Fed

The US Dollar Index has been hitting highs not seen for 20 years in recent sessions, as markets expect further aggressive action by Federal Reserve policymakers on the topic of monetary tightening. The US Dollar has climbed by almost 20% versus another safe-haven asset, the Japanese Yen, and climbed by 6.7% in April alone to mark the Yen’s worst-performing month since November 2016. Meanwhile, the Pound has also struggled against the mighty US Dollar, highlighting April as Sterling’s worst-performing month—when comparing open price to closing price—since September 2016. Last week saw the US estimated GDP growth figures for Q1 2022 read -1.4%, down from the far healthier previous reading of 6.9% in the final three months of 2021, marking the first contraction in the US economy since Covid struck in mid-2020. Meanwhile, hawkish bets for monetary tightening mean the central bank’s interest rate decision will be a major event this week. Fed policymakers will meet on Wednesday, with markets anticipating a 50 basis-point rate hike. To end a busy week, the highly influential US Non-Farm Payrolls stat will be out on Friday.

AUD and NZD

Interest rates rise for the first time in a decade

The Pound closed last week 0.26% higher versus the Australian Dollar, reaching six-week highs. However, despite the Australian Dollar benefiting from the recent commodities rally and remaining largely resilient to the uncertainty caused by the Russian war in Ukraine, concerns have been growing about the ongoing Covid lockdowns in China. The longer they continue, the more impact they’ll likely have on the country’s demand for Australian exports, causing uncertainty for the Aussie and Kiwi Dollars.

The major news Down Under for this week is that the Reserve Bank of Australia has raised interest rates for the first time in more than a decade to combat inflation, which is sitting at a 21-year high. RBA Governor Philip Lowe said that although inflation had picked up faster than expected, unemployment was low and there was evidence wage growth would improve. Lowe also commented that further interest rate hikes were imminent. Following the RBA’s previous stance that interest rates would be data-dependant, pressure on the central bank’s decision peaked last week when new data revealed a higher-than-expected rate of inflation in the country.

Against the New Zealand Dollar, Sterling closed last week 1.41% higher. New Zealand saw data releases around credit card spending, business confidence, and trade, but the ecostats failed to boost the Kiwi Dollar as the week progressed. New Zealand’s employment data is due in the Trans Tasman’s Tuesday trading session, and the Reserve Bank of New Zealand will hold a press conference on the 4th of May. Any comments regarding monetary policy, inflation, or growth prospects will be in close focus.

CAD

‘Forcefully if needed’

Last week, the Pound closed 1.23% lower against the Canadian Dollar, registering the lowest level of trading for the pair since August 2019. In a press conference, Bank of Canada Governor Tiff Macklem stated that ‘inflation is too high’ and higher interest rates would be needed. This comes after a half-percentage-point increase in interest rates at the BoC’s last meeting. Macklem went on to say that the central bank is willing to implement inflation-cooling measures ‘forcefully if needed’ after consumer prices hit a whopping 6.7% in March. Last Friday also saw some key growth data print positively as Canada reported its most significant monthly growth rate since March 2021 at 1.1%. Friday will be the day to watch in the upcoming week, as jobs data will make its way onto the market. The official Canadian Employment Change and Unemployment Rates for April will print, as well as wage growth numbers.