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Sterling ended last week at give or take the high of February against the Euro after developments in Ukraine put pressure on the European single currency, and this pressure is likely to remain over the coming weeks unless tensions are dissipated. The multiple shared borders and economic links between Ukraine and the rest of Europe is the main reason as to why the Euro has been most sensitive to the situation, which has helped keeping Sterling strong due to its distance from the issue. With regards to economic data, this week’s focus will come on Wednesday as policymakers from the BoE give their testimonies to the House of Commons Treasury Select Committee, where they will be subject to questions surrounding February’s report and current inflation trends. With UK retail sales coming in higher than expected (1.7% vs 1.1% expected), alongside better employment data, there is a likeliness that interest rates will be raised again in March. However, it is worth noting that inflation rose from 5.4% to 5.5% last month, which marks the smallest increase in inflation levels since April 2021. This could be a sign that although the figure is still rising, it could be starting to plateau which in turn might delay any MPC action and therefore cause downside risk for Sterling over the weeks and months ahead.
Amongst the three major currencies, the Euro is the one that will be struggling over the coming days and weeks as tensions across Ukraine create a negative domino effect for the European single currency. If Putin decides to invade Ukraine, the disruption to the economy and safety of surrounding countries will put a huge amount of pressure across midland Europe and this will no-doubt cause Euro weakness. The consensus within the market is that there won’t be any certain conclusion to diplomatic talks this week and this will likely cause investors to turn towards safe havens (USD, JPY, CHF etc.) as the idea of prolonged geopolitical risk becomes ever present. Within the last two weeks, Euro has lost over 1.5% against Sterling and almost 1% against the Dollar. Considering some places still have Covid restrictions in place, Europe is behind the UK and America in terms of recovery from the pandemic. The added tensions from Ukraine will only keep them behind in terms of progress and the outlook for the Euro is not the most promising, for now.
Unless the Ukrainian situation takes a decisive turn for the better, it is likely that USD will strengthen over the coming weeks as investors look to keep their funds protected from volatility. With tensions rising, Biden is ‘convinced’ Russian President Vladimir Putin will invade over the coming days. If his predictions are true, then it would cause a crisis that would send shockwaves across both stock and currency markets – most likely in favour of the Dollar.
Alongside tensions, high wages and low jobless rates boost the chances of a March rate hike from the Federal Reserve. The consensus across the market is that the Fed will raise their rates and eventually begin to reduce the size of its balance sheet. With regards to data, we turn to Thursday for GDP figures in the US which will give a gross measure of the market activity. It usually indicates the pace at which a country’s economy is growing or decreasing.