Month: February 2022

Geopolitical tensions escalate into a full-scale invasion – 

Regrettably, geopolitical tensions have peaked overnight into what appears to be a full-scale invasion of Ukraine. It appears very insignificant to be discussing the financial markets at times like this and we acknowledge that however we do feel obliged to keep our client base as well informed as possible on the currency markets and the broader implications on them.

Risk, has of course sold off across the board in the financial markets today – stock markets lower, bond markets higher, commodity prices higher ( supply chains cut off) – in particular, oil and gas higher, gold higher and safe-haven currency like the Dollar and CHF higher. Scanning the financial markets however this morning, currencies appeared to be initially quite well insulated, particularly relative to the moves seen in stock markets and bond markets. This was a short-lived calm and throughout the day risky currencies have been heavily sold, with the Dollar and Swiss Franc the stand out winners (losers).

As one would expect this is very much a European issue at its core and we have seen that feed through into the single currency – The euro. EUR/USD has taken a significant hit on the day, selling off almost 2% from its overnight highs, to trade a low of 1.1106 – levels not seen since the summer of 2020

Daily Chart – EUR/USD –

As can be seen from the longer-term chart below – we still have plenty of room on the downside to get back close to peak pandemic lows seen back in March/April 2020 and with plenty more room to play out in this narrative. Further downside cannot be ruled out. One such major risk event will be the full announcement of the allies’ sanctions on Russia and Putin’s reaction to these sanctions – we should have clarity on this within a few hours.

Longer Term Chart – EUR/USD

In addition to the Euro taking the brunt of the punishment today, Sterling has also felt the pain particularly versus the Dollar – a nice round 2% decline. The UK’s exposure to Russian wealth and its banking system explains this move.

Daily Chart – GBP/USD –

This dynamic, where both Sterling and Euro have sold off against the Dollar, has meant that for the time being EUR/GBP has been relatively stable on the day – see daily chart below.

Daily Chart – EUR/GBP –

Disclaimer

The content of this report is for information purposes only. Nothing in this report should be considered financial, investment, legal, tax or other advice nor should it be interpreted as a recommendation to buy or sell foreign currency or any other products or services. Readers must carefully make their own decisions based upon their specific objectives and financial positions.

Treasury First is powered by Assure Hedge (UK) Limited, a company incorporated in England and Wales (No.10723112) with its registered office at 45 Eagle Street, London WC1R 4FS, UK, is authorised and regulated by the Financial Conduct Authority of the UK (FRN:783837). Assure Hedge Limited, the parent company, is incorporated in Ireland (No. 578153) with its registered office at Dogpatch Labs, CHQ Building, North Wall Quay, Dublin 1, Ireland. 

GBP/EUR – The 1.20 level acts as a magnet once again

Regular readers of our currency market reports will know that we have been watching this psychological level in GBP/EUR at 1.20. This 1.20 level has defined the range since earlier Jan and had not been breached since the beginning of 2020. In fact, we have not been properly above this level since mid-2016 – pre-Brexit. See long term chart of GBP/EUR below –

Long Term Chart – GBP/EUR – 2016-2022

As mentioned previously we have been looking for clues as to whether we would get a continuation of the recent trend higher in GBP/EUR or if the resistance at this 1.20 level would cap the topside momentum and push us back into a lower range. The drama of the Bank of England and the ECB interest rate meetings at the beginning of the month looked to change the landscape somewhat. Although the Bank of England hiked rates, it was a dovish hike, which meant the currency only rallied briefly. The ECB however surprised the markets by opening the door on rate hikes – previously the belief had been the European Central Bank would be the last major central bank to increase rates. This threw the cat amongst the pigeons on the day and the following 2 trading sessions, with GBP/EUR falling back down to a low of 1.1795.

GBP/EUR – Lows post BOE and ECB rate decision meetings –

The market suddenly became very exciting about a more hawkish pivot by the ECB and given the high levels of GBP/EUR – began to sell Sterling and buy Euros.

Geopolitical tensions began to increase over the Ukraine situation over the past 2 weeks. As we have outlined before, traditionally this would be negative for Sterling. A risk-off environment historically tends to see Sterling weaken. This, combined with the actions of the ECB, was, in theory, the perfect storm for GBP/EUR lower. Surprisingly this has not been the case this week and instead of selling off, GBP/EUR has rallied back to this 1.20 magnet level.

There is plenty to still monitor and this maybe just a function of market positioning, however, a break and weekly close above this year’s highs at 1.2069, would be very significant – watch this space……

GBP/EUR – short term chart

Things just got complicated

Central Banks take centre stage

Last week saw some significant shifts in the central bank landscape in the G10 space, which have certainly complicated things somewhat. Last Thursday saw rate decision meetings from the Bank of England and ECB, which threw up several surprises, to say the least, and which have had major vibrations amongst global asset classes, none more so than the FX currency markets.

Proceedings were kicked off by the Bank of England, as they hiked interest rates by 25 bps to 0.5%, as was expected by the markets. What was not expected was that 4 out of the 9 member Monetary Policy Committee (MPC), whose job it is to set interest rates, voted for a 50 bps hike in rates – this close call – 4 to 5 votes in favour of a 50 bps hike, would have been a huge surprise for the markets. This voting dynamic amongst the members of the MPC gives the market a good insight into what may be coming down the line from the Bank of England. As expected Sterling rallied on the announcement – see chart below – however, its momentum was halted for two reasons;

GBP/USD – post-BOE interest rate increase

1. Comments from the Governor of the Bank of England during the press conference post the rate decision – Governor Bailey suggested the rise in interest rates was purely down to inflation and not an overheating of the UK economy and such hikes could have a significant impact on real household incomes going forward – in market terms this was a ‘’dovish hike’’ by the central bank.
2. The shift in policy stance by the ECB – caused EUR/GBP to rally and GBP/USD to halt in its tracks – more on this below >>

Post the Bank of England it was the turn of the ECB to take centre stage with their rate announcement on Thursday– with the market’s expectations firmly in the camp that Lagarde would stick to her mantra – ‘’no change, playing a straight bat, let’s see how things are in March at the next meeting when we will have the new economic projections from the ECB economists’’. Well, that was a mistake, as the ECB went from never hiking interest rates and Euro being the perennial funder, to Lagarde sighting inflation as a real concern in her press conference and opening the door to future rate hikes. This is a huge pivot for the ECB, which occupied the most dovish central bank category along with the SNB and the BOJ. Markets immediately began to price in rate hikes this year and the Euro rallied hard versus most currencies – in particularly the Dollar and Sterling. See chart of EUR/USD  and EUR/GBP below –  The market is now pricing in up to 35 bps of interest rate hikes into Dec 2022 – if this was to increase, we could see a significant move in the Euro across the board…. Watch this space.

EUR/USD – post-ECB hawkish pivot

EUR/GBP – post-ECB hawkish pivot

Disclaimer

The content of this report is for information purposes only. Nothing in this report should be considered financial, investment, legal, tax or other advice nor should it be interpreted as a recommendation to buy or sell foreign currency or any other products or services. Readers must carefully make their own decisions based upon their specific objectives and financial positions.

Treasury First is powered by Assure Hedge (UK) Limited, a company incorporated in England and Wales (No.10723112) with its registered office at 45 Eagle Street, London WC1R 4FS, UK, is authorised and regulated by the Financial Conduct Authority of the UK (FRN:783837). Assure Hedge Limited, the parent company, is incorporated in Ireland (No. 578153) with its registered office at Dogpatch Labs, CHQ Building, North Wall Quay, Dublin 1, Ireland. 

Increased Volatility in Currency Markets

We continue to focus on EUR/USD, GBP/USD, and EUR/GBP

Avid readers of our weekly currency report will know we have highlighted the importance of the central bank in the coming 12 months and how their actions surrounding interest rates and the tightening of monetary policy will have a significant impact on the currency markets. We believe that as central banks increase interest rates, we should see an increase in FX volatility – interest rate differentials being one of the major drivers of global currencies.

Our first interlude into this theory was proved correct, as we saw huge Dollar buying post the Federal Reserve meeting last Wednesday – see chart below for the move lower in EUR/USD. The Fed Chair Powell delivered a more hawkish speech during the press conference after which the market has subsequently priced in more US interest rate hikes for 2022 than was previously thought.

EUR/USD sells off-post-Federal Reserve Meeting – over 3%…….

What a difference a week makes –

The market’s fickle nature has kicked in this week, as it now turns its attention to the two central bank meetings today – the Bank of England and ECB.

Although in theory, both central banks are at very different stages on the monetary policy curve, the market is getting excited about both, and the Euro and the Pound have rallied back this week versus the Dollar.

Bank of England – a full 25 bps hike is priced in by the market for the BOE today, which would bring interest rates in the UK to 0.5% – noon London time. With 25 bps pretty much a done deal we feel, the question then arises as to whether this is a hawkish hike by the central bank, indicating there are more hikes around the corner or whether they will adopt a more cautious approach.  A hawkish hike should lead to an appreciation of the currency and in particular versus the Euro. The hike would increase the interest rate differential between the UK and the Eurozone.  We have already seen a strong downtrend emerge in EUR/GBP over the past 12 months or so – where the Sterling has gained in strength versus the Euro – this trend could well continue if the BOE produce a hawkish interest rate hike today – see chart

EUR/GBP – downtrend – GBP strength – 10% since Dec 2020

We also get the interest rate decision from the ECB and Lagarde today where no change in monetary policy is expected – 12.45 pm London time. There are however some elements of the market that are looking for the ECB council to acknowledge the inflation pressures in Europe and to possibly pivot more hawkish in their outlook…… watch this space…..