The Euro, together with the Swedish Krona and the Swiss franc led the G10 rankings last week. The sense that the Russian invasion may be entering a less catastrophic stage certainly helped, as did the pullback in oil prices after Biden announced massive sales of oil from the US strategic reserve to try and put a lid on energy inflation. The sharp rise in worldwide energy prices has been a source of trouble for the Euro, given the bloc’s dependence on oil and gas imports. The Norwegian kroner sold off sharply on this latter news. However, lower oil prices did nothing to stop the scorching rally in emerging market currencies, led once again by Latin American ones.
Next week, economic data is relatively light. The focus should be on central bank communications, as both the Federal Reserve (Wednesday) and the ECB (Thursday) will release the minutes of their respective March meetings. The Fed should validate the increasing tightening priced in by markets with a decided hawkish tone. The tone of the ECB minutes is more difficult to predict, but we expect to see a clear divide between the doves and the hawks, with the balance moving steadily in favor of the latter as relentless inflationary pressures become harder to explain away. This should be supportive for the common currency.
The main news of the week out of the UK was a positive revision to the fourth quarter economic growth numbers, but markets roundly ignored this backward looking number. Instead, the perceived Bank of England dovishness continues to weigh on the Pound, which lost ground last week against most of its peers. This week is also light in data, and focus will be on Bank of England chief economist Pill’s speech on Thursday.
The March inflation report delivered another spectacular upward surprise at 7.5%, as the headline number blew away already high expectations, thanks mainly to the spikes in Spanish and German prices. The core index was more subdued at 3.0%, but the low weight assigned to housing prices in this index explains some of the quiescence. The lower oil price after Biden’s strategic reserve announcement certainly helps the Eurozone’s battered terms of trade, and that explains the Euro’s rebound in recent days. However, a sustained upward trend in the common currency will have to wait for a more clear hawkish shift from the ECB and the prevalence of the hawks in its internal debate. We expect to see this over the coming weeks, starting with the release of the ECB March meeting minutes Thursday.
Another strong labor market report out of the US confirms that the economy is at full employment and labor shortages in many sectors are unlikely to be solved soon, which means inflationary pressures will continue to spread, in our view. All eyes now turn to the release of the minutes for the Federal Reserve March meeting, which is expected to include details on the reduction of the central bank’s enormous holding of Treasuries and mortgage bonds. The key figure will be the rate at which the Fed allows the bonds on its balance sheet to run off without reinvesting the proceeds. Anything above 80 billion dollars per month will be considered hawlish and may lead to a knee jerk rally in the US dollar.