Recession warning

GBP

Recession warning

One of the market’s main focuses at the moment is action from central banks around the world as inflation continues to rise globally. The Bank of England has been no exception, and last week, opted to increase interest rates from 0.75% to 1.0% in line with predictions. The BoE is forecasting consumer prices to rise above 10% in the last three months of 2022, which will be encouraged by higher energy costs in October. Simultaneously, the central bank has cut growth forecasts, with expectations for a fall by as much as 1.0% in Q4, and the potential for negative growth in 2023. While all members of the Monetary Policy Committee voted to increase rates, three of the nine members were pushing for a larger 50 basis-point interest rate hike. This came despite a weaker growth outlook and the potential of recession in the UK economy. Following the BoE’s announcement, Sterling slipped against other currency majors, with GBP/USD falling 1.80% and GBP/EUR tumbling by 1.20% after the news. By the close of trading that day, GBP/USD was 1.25% lower, and GBP/EUR was 0.89% softer. In the week ahead, important UK growth data will be released, as well as manufacturing, construction, and industrial numbers.

EUR

Heading back to positive territory 

The Pound closed 1.8% lower versus the Euro last week in its worst-performing week since April 2021. While major central banks around the world are looking to tighten their monetary policy, the European Central Bank is still treading with caution. Out of the G10 economies, the ECB, along with the Bank of Japan and Swiss National Bank, are the only ones not to have made a move as of yet to battle inflation. In the Eurozone, inflation recently reached 7.5%, meaning ECB policymakers are under more pressure to take action. The Euro has enjoyed a moderate lift at the start of this week after some ECB members commented on bringing interest rates back into positive territory, potentially as soon as June. Such a move could be beneficial for the Euro, which has been trading at five-year lows against the US Dollar. There’s not a huge amount of highly influential data from the Eurozone this week, but the ZEW sentiment indexes will be released for both the Eurozone and its largest individual economy, Germany. Inflation Rate data for Germany will also be released, as well as Eurozone Industrial Production.

USD

Sharpest hike in 20 years

The Pound to US Dollar currency pair slipped by 1.70% during last week’s sessions; the US Dollar story has continued to be a strong one with many currency majors softening against it. Meanwhile, the Federal Reserve attempted to tame unruly inflation, with the sharpest interest rate hike seen from the bank in more than 20 years. The interest rate increased by 0.5%, to hit 1.0%, after a 0.25% increase in March, which had been the first since December 2018. The central bank reiterated that inflation ‘remains elevated’ and that there were ‘highly uncertain’ circumstances around the Russian invasion of Ukraine and the impact this may have on the US economy. The first session following the Wednesday evening announcement saw the US Dollar climb by 1.12% against a basket of other majors.  In the week ahead, highly significant inflation data will be released, and a number of Federal Reserve representatives will be speaking.

AUD and NZD

Jumping on the rate hike train 

The Pound finished last week 1.92% lower versus the Australian Dollar, and just 0.13% softer against the New Zealand Dollar, despite trading within a range of over 5 cents (2.7% range) against the Kiwi throughout the week. Last week, the Reserve Bank of Australia, opted to increase interest rates to 0.35%—despite forecasts to rise to only 0.25%. The Aussie Dollar jumped on the back of the news against other currency majors. The hike came along with suggestions for further increases, amid an election campaign, and was a surprise to markets, which had anticipated a slower path of monetary tightening. Central banks around the world are having to adopt more proactive strategies to manage rampant inflation.
 
Meanwhile, the Reserve Bank of New Zealand released its Financial Stability Report, which highlighted the potential for a softening in the labour market, should interest rates need to be hiked more than the bank currently expects. In terms of data, high-tier labour market stats printed in line with forecasts. New Zealand data released in the next week will show manufacturing and card spending numbers. In Australia, Consumer Confidence, Retail Sales, and Building Permits stats will all make their way onto the market this week.

CAD

GBP/CAD touches lowest level since January 2017

The Pound closed last week’s trading 1.23% lower against the Canadian Dollar, touching its lowest level since January 2017. Last week, the Canadian Unemployment Rate printed in line with forecasts at 5.2%. Meanwhile, Employment Change disappointed, coming in below forecasts to show only 15.3K had people entered the workforce—markets had anticipated a stronger 55K figure. The week ahead is rather quiet for Canadian ecostats; however, Building Permits and the Senior Loan Officer Survey which details lending conditions will be released. Due to the lack of data out in Canada this week, the Loonie may be more sensitive to geopolitical developments, and commodity price changes—particularly oil as it’s Canada’s largest commodity.