Jamie Jemmeson
April 11, 2022

US Dollar Strengthens Ahead of Key Data and ECB Meeting

Signposting for further hikes but risks remain

Last week we saw the US Dollar strengthen on the back of two factors. Firstly, the release of the Federal Reserve’s (Fed) Minutes report from the March meeting were bullish and provided a reminder of the aggressive stance recently adopted by the Central bank. The report revealed that central bank Policymakers are determined to move the monetary policy to neutral expeditiously and that a move to a tighter policy could be warranted. The report also revealed that several officials would have preferred a 50-basis point hike at the March meeting, rather than the confirmed 25-basis point lift. Secondly, risk aversion returned to the market following an escalation in tension in Ukraine and increased tensions which resulted in further sanctions. This has had an adverse effect on the outlook for a quick ending to the war.

Over the weekend, we saw the start of the French elections which Emmanuel Macron has won the first round of the French election and far-right rival Marine Le Pen will fight him for the presidency for a second time. With 97% of the results counted, Emmanuel Macron had 27.6% of the vote, Marine Le Pen 23.41% and Jean-Luc Mélenchon 21.95%. The final run-off is due on 24April.

The week ahead is a shortened one with the Easter holidays which could result in greater volatility as liquidity thins.

Will UK Headline Data Paint a Mixed Picture?

Looking to the week ahead the market will focus on the more significant economic data that is set for release. On Monday we have the release of the monthly GDP following a reading of 0.8%. The all-important labour market data is set for release on Tuesday. The main focus here will be on the average earning figures given the cost-of-living crisis that the UK is experiencing. The unemployment rate is expected to slide but the average earning is expected to lag the inflation figure. Finally, on Wednesday, the headline inflation numbers are due for release. Headline inflation is expected to reach around 8% in April as the sharp rise in regulated Ofgem prices takes effect.

Will the ECB Signpost a Rate Hike for this Year?

The headline event for the region will be the ECB meeting on Thursday. No policy adjustments are expected this time because it had already signposted a likely end to QE in Q3. The market will be looking for clues on the future policy as rhetoric from central bankers has mixed in an environment of falling business and consumer confidence whilst inflation continues to soar. Markets will be deciphering ECB President Lagarde’s language at the press conference for clues regarding policy prospects especially closely. Pressure may be building for QE to end as early as July and markets expect the ECB’s deposit rate, currently at -0.5%, to be brought out of negative territory by the end of the year. If we see language that suggests this, we could see the single currency strengthen.

Will US Economic Data Continue to Point to a Super Hike Next Month?

With the focus now on whether the Federal Open Market Committee (FOMC) will raise by 50 basis points in May, the attention will remain on economic data. The annual headline CPI inflation (Tue) accelerated to 8.4% in March from 7.9%; the highest since 1982. In the meantime, core inflation is expected to increase. On Wednesday, the producer price index (factory-gate inflation) is due.  If we see headline inflation and factory gate inflation push higher, it will only heighten expectations of a 50-basis point hike next month. Consumer spending is due for release on Thursday in the form of the retail sales figure.

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