Weekly Brief

Rate hikes galore

GBP

Sterling (GBP) has continued to feel the pressure this week, wounded by a double-edged sword combining the ongoing ‘partygate’ situation facing the prime minister, and the fallout from Wednesday’s hawkish Fed conference across the pond (USD). While investors initially saw little cause for economic concern over the findings of the inquiry into the alleged lockdown parties, it has since been suggested that the PM may be gearing up to scrap the contentious national insurance hike in a bid to save his job and win back the support of his fellow Tories. The report is expected to be released to the public on Monday and may carry implications for the pound.

Adding to sterling’s (GBP) woes this week were disappointing retail sales data and an 11-month low for UK business growth. Retail sales in January were down by 23% compared to seasonal norms due to the surge in Omicron cases. The UK service PMI fell to 53.3 from 53.6, failing to meet the expected 54.8. Meanwhile, the UK manufacturing PMI came in at 56.9, below the previous and forecast 57.9. Investors will be keeping an eye on commentary from the Bank of England next week as continuing inflationary pressures and the lingering economic threat of the pandemic mean that another rate hike is to be expected in early February.

 

EUR

While the euro (EUR) has enjoyed a relatively stable week, it appears no match for the soaring USD. Ahead of the Fed’s expected rate hikes and imminent tapering of asset purchases, the EUR/USD has fallen to a fresh two-month low, which may not be the end of the pair’s downtrend. Even against the pound (GBP), which has had a plethora of setbacks to contend with, the euro (EUR) has failed in the end to hold its ground, with sterling climbing to an almost two-year high against the euro (EUR). On the ever-present topic of inflation, the Eurozone is forging its own path, with the European Central Bank (ECB) saying that a rate hike this year is unlikely, despite inflation sitting at a high 5%.

Rising tensions between Russia and Ukraine also have the potential to cause a significant blow to the European economy, with the European Union currently discussing what sanctions may be imposed should Russia attack. The euro (EUR) has already suffered losses, dropping to a one-month low, and the ECB’s Lithuanian governor Gediminas Šimkus has urged politicians to step up to diffuse the conflict, warning of a major economic risk to the euro (EUR) should the situation escalate.

 

USD

The USD ends the week leaving the majority of the other majors in the dust, thanks to the US Federal Reserve’s aggressive stance on taming red-hot inflation, which currently sits at a 40-year high of 7%. Following day-two of the Federal Open Market Committee (FOMC) meeting on Wednesday, Chairman Jerome Powel gave a clear signal that interest rates will rise and asset purchases will end in early March ‘assuming that conditions are appropriate for doing so’.

While the US dollar (USD) rallied on the news, soaring to a two-month high against the pound (GBP), rising 1.7% against the euro (EUR) and over 2% against the Antipodeans (AUD) (NZD), investors appear nervous about the fast pace with which the era of cheap money could end. Deutsche Bank predicts a rate hike at every meeting from March to June, amounting to five hikes this year, which could knock the USD off its winning streak.

In more positive news for the US dollar (USD), weekly jobless claims dropped by 30,000 to 260,000, Q4 GDP increased by an impressive rate of 6.9%, and Thursday’s report by the Commerce Department cited a robust rebound from 2020 for the US economy, which logged its best performance since 1984, growing 5.7% in 2021.

 

CAD

The commodity-dependant Canadian dollar (CAD) is experiencing a boost in response to strengthening oil prices and increased demand. Simmering tensions between Russia and Ukraine caused crude oil prices to soar to a seven-year high during the week, causing the CAD to welcome modest gains against the pound (GBP), helped by the political struggles faced by sterling back on home soil.

Talk around inflation and interest rate hikes is of a similar tone in Canada as for its peers elsewhere. Bank of Canada governor Tiff Macklem announced on Wednesday that the Canadian economy no longer needed fiscal aid to recover from the economic effects of the pandemic, and so rising interest rates can soon be expected as a means of tackling high inflation. Rates have remained at a record low since March 2020, and so several increases are expected, while the question of ‘how many and how fast’ remains dependent on economic developments. The next assessment is due to take place on March 2nd.

 

AUD

At the beginning of the week, the struggling Aussie (AUD) made some sharp gains against the other majors in response to a better-than-expected domestic inflation reading. According to data published by the Australian Bureau of Statistics, Australia’s consumer price index came in at 3.5% in the fourth quarter of 2021. This was up from 3% in Q3 and also entered above market consensus for a more modest rise to 3.2%.

The inflation rise appeared to be caused by climbing housing and fuel prices, and has sparked expectations that, as in most corners of the globe, an end to quantitative easing may be fast approaching, and the Reserve Bank of Australia may be expected to start increasing interest rates before the end of the year.

However, closing the week, the Aussie (AUD) has struggled to hold onto its earlier gains, falling against the rallying USD and failing to gain much momentum against the pound (GBP).

 

NZD

The kiwi (NZD) found itself in a precarious position this week ahead of the FOMC meeting in the US, dropping to a fresh yearly low against the greenback (USD) with notable declines also felt against the euro (EUR), and the Japanese yen (JPY). However, the kiwi closes the week with soaring concerns over inflation, which following yesterday’s release of fourth quarter Consumer Price Index (CPI) data is at a shocking 30-year high. 

Transport, Housing and Household Utility are cited as the main factors contributing to the price increases, reflecting that rising costs in fuel and housing prices are pressuring consumer spending. The Reserve Bank of New Zealand (RBNZ) has raised rates twice at its last two meetings and signalled that it is ready to take further action to combat inflation and surging house prices. Policy makers are expected to make their next interest rate decision on February 23rd.

 

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