• Audere Research

Foreign Exchange Analysis ~ 21 March 2022

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GB Pound

The interest rate announcement by the BoE checked an otherwise positive week for the Pound.


Movements

GBPUSD opened at 1.3046 and after initially flirting with the 1.30 level (the lowest level in one and a half years) it began to recover some ground, reaching 1.3210 ahead of the BOE policy meeting. It then sharply dropped after the rate announcement, down to 1.3085. It finally closed at 1.3158 for a weekly gain of 0.86%.


GBPEUR opened at 1.1929 and traded in a relatively wide range (1.1830-1.1940). It finished the week at 1.1907 for a limited loss of 0.18%.


Movement rationale

Sterling was once more relatively weak at the beginning of the week, with GBPUSD hitting its lowest level since October 2020 (1.30) as geopolitical turbulence weighed on the currency. Another reason was increased confidence in the Dollar ahead of the FOMC meeting which took place on Wednesday. However, after a month-long sell-off against major peers, sentiment around Sterling improved as global markets rebounded due to optimism about peace talks between Russia and Ukraine. Also, GBP was supported by robust labour data, with unemployment dropping to pre-pandemic levels (3.9%). However, Thursday’s BoE announcement sparked a sharp sell-off of in the UK currency as investors expected more MPC members to vote for a 50bp hike. Although interest rates were raised 25bp, the BoE softened its language on the need for further increases. Note that only one of nine members voted for no change, over concerns on real income squeeze. Both the Dollar and the Euro immediately gained on the Pound after the announcement, with the currency then managing to recover some ground going into the weekend.


Week ahead

Any volatility next week will likely be heavily apportioned to changes in Russia/Ukraine negotiations with events in the economic calendar causing less volatility.


Calendar

Wednesday 7am | Consumer Price Index (Feb)

Thursday 9:30am | Markit Services PMI (Mar)

Friday 7am | Retail Sales (Feb)


US Dollar

The Dollar lost some of its recent gains against the Pound and Euro.


Movements

EURUSD opened at 1.0939 and steadily appreciated for most of the week, touching 1.1135 on Thursday. It then temporarily dropped 1% over the successive 24 hours, finding support at 1.10. Nevertheless, it closed the week posting its biggest weekly percentage gain since the first week of February (+1.03%) at 1.1049.


GBPUSD opened at 1.3046 and after initially flirting with the 1.30 level (the lowest level in one and a half years) it began to recover some ground, reaching 1.3210 ahead of the BOE policy meeting. It then sharply dropped after the rate announcement, down to 1.3085. It finally closed at 1.3158 for a weekly gain of 0.86%.


Movement rationale

With the Federal Reserve ruling out a 50bp interest rate hike when the invasion of Ukraine began, its decision to increase rates by 25bp on Wednesday marked the first-rate hike in America since 2015. The central bank also signalled that more rate increases are coming in an effort to curb inflation. However, this news wasn’t enough to further support the Dollar as the following day investors digested the Fed's monetary policy outlook, apparently having expected more hawkish language. Further, hopes for a compromise in Russia and Ukraine peace talks allowed GBP and EUR to gain on USD. The Greenback then managed to bounce back on Friday after two Federal Reserve officials said the central bank may need to be more aggressive to deal with inflation.


Week ahead

Dollar price action will be mostly related to development in the Ukraine-Russia conflict, with any escalation likely to favour the dollar as a safe-haven currency.


Calendar

Thursday 12:30pm | Durable Goods Orders(Feb), Initial jobless claims (Mar 18), Markit PMI Composite (Mar)

Friday 2pm | Michigan Consumer Sentiment Index (Mar)


Euro

Euro enjoyed gains against the Dollar, reversing the downward trend since the beginning of the Ukraine invasion.


Movements

EURUSD opened at 1.0939 and steadily appreciated for most of the week, touching 1.1135 on Thursday. It then temporarily dropped 1% over the successive 24 hours, finding support at 1.10. Nevertheless, it closed the week posting its biggest weekly percentage gain since the first week of February (+1.03%) at 1.1049.


GBPEUR opened at 1.1929 and traded in a relatively wide range (1.1830-1.1940). It finished the week at 1.1907 for a limited loss of 0.18%.


Movement rationale

Because of the light economic calendar from the ECB, the Euro was primarily influenced by developments in Ukraine and elsewhere. It benefited from both the BoE’s and Fed’s dovish interest rate announcements while the consensus remains that the ECB’s interest rate hikes will be later in 2022 or early 2023. The Euro was helped by Ukraine and Russia entering their fourth round of talks at the beginning of the week, although this may prove to offer brief support depending on the outcome. In terms of economic data, the final Eurozone inflation reading came in above forecasts (at 5.9% last month, the highest figures since the currency was created in 1999), piling more pressure on the ECB to move quicker. This data provided support for the single currency, which eventually recovered significant ground against major rivals.


Week ahead

As talks between Russia and Ukraine continue, volatility may arise if a stalemate or progress is reached.


Calendar

Wednesday 3pm | Consumer confidence (Mar)

Thursday 9am | Markit PMI Composite (Mar)



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