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US Dollar strengthens to levels not seen since 2002

Last week we saw the US Dollar continue to strengthen across the board. The Dollar index is now trading at its highest level since 2002, emphasising the current strength of the currency. EURUSD is at its lowest level against the US Dollar since 2017 and GBPUSD since 2020. The ongoing strength of the currency remains anchored to interest rate expectations following the FOMC meeting at the beginning of the month where they suggested that we will see 50 basis points hikes for the next two months.

Sterling remains fragile due to ongoing concerns surrounding the economy with regards to the cost-of-living crisis which were highlighted by HRH Prince Charles during the Opening of Parliament. In addition, various political commentators have been discussing the risk that, after a poor showing in local elections, the UK government will look to push ahead with a legislative agenda that could be more combative on the Northern Ireland trade and the protocol. Concerns were further compounded as GDP growth fell in March by 0.1% confirming that the strong start to the year was the high point.

In the meantime, the single currency remained on the backfoot despite some hawkish comments from officials. European Central Bank (ECB) council member Makhlouf stated that the era of negative rates is reaching a conclusion. He added that the current level of inflation is concerning, and it was realistic to expect rates to be in positive territory by early next year. There was fresh unease over developments in the energy sector with Ukraine stating that it will not re-open the suspended gas transit route from Russia until Kyiv gains full control over the transit system.

Could a packed calendar change Sterling’s fortunes?

The week ahead is packed with key economic releases that could help the market to second guess the potential for further Bank of England (BoE) policy action. Today, BoE Governor and several MPC members testify on inflation and the economic outlook before Parliament’s Treasury Committee. The market will look for clues on policy moving forward. On Tuesday, labour data is set for release; particular focus will be in the average earnings figures. Probably the main focus of the week will be on the inflation numbers due for release on Wednesday. The headline inflation number is due to rise to 9.1% from 7.0%. Finally on Friday, retail sales are expected to return to growth from the negative reading of 1.4%. If we do see another negative reading here, there will be further question marks around the strength of the economy.

Will economic data support an aggressive rate hike cycle?

Looking to the week ahead, a relatively quiet week of significant data releases as markets will evaluate the upcoming April retail sales data scheduled for releases on Tuesday, as concerns for a US recession grow. The latest Retail sales print is expected to show a drop of 0.9% on a month-on-month basis, which would be up from 0.5% on a monthly reading in March. A better-than-expected reading may calm concerns over an impending economic slowdown.

Elsewhere, Fed officials will continue to provide commentary through the week, with the spotlight on Fed Chair, Jerome Powell, and his comments on Tuesday.

Will ECB further signpost rate hikes?

In the Eurozone, there are growing indications that high inflation is prompting European Central Bank policymakers towards an early interest rate hike despite ongoing concerns about economic growth. Today, the market will focus on the economic forecast for the region with particular attention on the inflation reading. Last week, ECB President Lagarde suggested that a rate rise might follow hot on the heels of an end to the asset purchase programme early in Q3. Lagarde is speaking again on Tuesday and the market will once again focus on her rhetoric for clues on future policy. In terms of economic data, the market will focus on the region inflation reading, which is expected to remain unchanged at 7.5% on Wednesday. Following this we have the consumer confidence readings on Friday.

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