• Audere Research

Foreign Exchange Analysis ~ 4 April 2022

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GB Pound

The Pound had a volatile week against the Dollar despite strong GDP print.


Movements

GBPUSD opened at 1.3151 and traded mostly in a tight range (1.3070-1.3180), closing slightly lower (-0.15%) at 1.3131.


GBPEUR opened at 1.2005 and headed lower during the first part of the week, reaching a 3-month low early morning on Thursday (1.1750). It then partly recovered, halving losses to -0.87% to close at 1.1900.


Movement rationale

As the invasion of Ukraine entered the fifth week, geopolitical developments continued to drive GBP. President Zelensky made concessions by dropping plans to join NATO and assuring Putin of zero nuclear weapon production in Ukraine. President Putin stated that Russia would scale down military operations around the capital. Apparent progress in peace talks improved market sentiment and prompted investors to move toward riskier currencies, partly supporting Sterling against the Dollar. However, GBP lost ground versus the Euro (GBP/EUR hit its lowest level in a year before recovering some ground) due to comments from the BoE. Bailey signalled evidence of an economic slowdown, lowering the magnitude of expected rate hikes this year. In relation to economic data, a UK GDP-beat failed to give GBPUSD momentum with the currency pair fluctuating throughout the week. Finally, as rising prices concern governments globally, the UK announced it is looking to extend the grace period for EU imports with an aim to protect businesses from inflation.


Week ahead

A light economic calendar is likely indicative of another week of geopolitical developments affecting GBP volatility.


Calendar

Monday 9am | BoE's Governor Bailey speech


US Dollar

The Dollar lost some ground following optimism around Russia-Ukraine


Movements

EURUSD opened at 1.0954 and initially moved higher, gaining 2% and hitting a 1-month high at 1.1180 on Thursday. It then partly reversed the movement to close at 1.1034 (+0.73%).


GBPUSD opened at 1.3151 and traded in a tight range (1.3070-1.3180), closing slightly lower (-0.15%) at 1.3131.


Movement rationale

A multitude of factors moved the Dollar last week, causing mixed performance. As positive news from Ukraine improved sentiment in the FX markets, participants began to move away from safe-haven assets such as the USD, which hit a 4-week low on Thursday. However, the Greenback remained relatively supported by expectations of an interest rate hike, limiting the sell-off. This was helped by Nonfarm payroll data on Friday (430k increase) suggesting the job market remains healthy, pushing the 2-year Treasury yields to a 3-year high. The market now expects 50bp hikes at both the May and June FOMC meetings. However, the rise of short-term bond yields above those of longer-term bonds, a market distortion called yield curve inversion, is starting to worry investors, as this is generally perceived as a signal of a recession. This contributed to limiting the USD recovery towards the end of the week.


Week ahead

This week’s focus for the USD will be on the minutes from the last FOMC meeting, which could provide more colour on future paths of rate hikes.


Calendar

Tuesday 2pm | ISM Services PMI(Mar)

Wednesday 6pm | FOMC Minutes

Thursday 12:30Am | Initial jobless Claims (Apr 1)


Euro

The Euro briefly traded at the highest level against Sterling this year. It also advanced versus the Dollar, although, part of its gains were lost in the latter half of the week.


Movements

EURUSD opened at 1.0954 and initially moved higher, gaining 2% and hitting a 1-month high at 1.1180 on Thursday. It then partly reversed the movement to close at 1.1034 (+0.73%).


GBPEUR opened at 1.2005 and headed lower during the first part of the week, reaching a 3-month low early morning on Thursday (1.1750). It then partly recovered, halving losses to -0.87% to close at 1.1900.


Movement rationale

While events last week were interpreted as a mixed bag for USD, Europe seemed to be supported by numerous positive updates. First, the Euro benefitted from prospects of a de-escalation of the conflict as Russia dropped some of its demands. Second, inflation prints across the region beat expectations, growing at the fastest rate in nearly four decades. With higher inflation the market now expects the EUR deposit rate to rise to zero by December for the first time since 2014. This helped the Euro and pushed European yields higher. Finally, the UK looked at pushing back the Brexit grace period for EU imports (for the fourth time) which improved the outlook for many European equities in the Stoxx 600. All this contributed to the Euro hitting the highest level in a month against the Dollar (before losing some of the gains). However, with Germany passing an emergency gas law preparing for gas rations, any developments in gas and oil next week will likely spark volatility for the single currency.


Week ahead

Following last week’s figures showing that inflation is running high across the Eurozone, this Thursday’s release of the latest ECB minutes could shed light on growing concern that the central bank is behind the curve on interest rates.


Calendar

Thursday 11:30am | ECB minutes, Retail Sales (Feb)


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