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The foreign exchange market this month has again been characterised by global risk sentiments driven by the conflict in Ukraine and subsequent geo-political developments. Headline inflation hitting a fresh four-decade high of 8.5% in the US also sent shockwaves through the market as it drove the prospect of a 0.5% rate hike when the Federal Reserve next convene to set interest rates on 4th May. Given the USD’s position as a safe haven asset, these risk-off sentiments have feed into dollar strength which has been further assisted by investors weighing on the market’s expectation of the increasing divergence between the Fed’s interest rate relative to other central banks, notably the European Central Bank, Bank of England and Bank of Japan. As such, King Dollar made further gains over April appreciating around 4.5% on the DXY Index, hitting highs not seen since 2003. This indicates that the DXY has seen close to a 13% rise over the last year, with any further deterioration of the war in Ukraine or a 75bp rate hike from the Fed likely to accelerate these gains.
The prospect of the Federal Reserve’s rate hikes has been the subject of considerable attention and volatility throughout April. On 21st April afternoon, Fed Chairman Jerome Powell sent shockwaves through the market as he signalled a further tightening of the Feds monetary policy when they meet on 4th May. With headline inflation over four times above target – and expected to rise further – speaking at an IMF meeting, Powell stated that a “50 basis points will be on the table for the May meeting”. Assisted by these comments, the market has now pretty well priced in a rise of 50bpts for the next FOMC meeting, with many speculating that a further two 0.5% hikes may come in before the end of summer. The general market consensus now also suggests that the base interest rate could be 2.75% by the end of the year. These hawkish remarks saw the Dow Jones finish that day’s session 1.1% lower, while the Nasdaq dropped 2.1%. It also sent U.S. Treasury yields higher with the yield on the benchmark 10-year Treasury note, standing at 2.955% - a considerable rise from where it started the year at 1.5%.
Nevertheless, the Federal Reserve remain in a precarious balancing act given that any rate hike and subsequent contraction of liquidity in the market will likely dampen growth. This is particularly alarming given that US Q1 GDP Figures released on 28th April indicated that output fell 1.4% on an annualised basis, the first contraction in growth since mid-2020 when Covid lockdowns hammered output. This data also followed the US trade deficit hitting record highs of $125bn over March representing a 17.8% rise. Given persisting inflation, supply chain issues and the prevailing risk-off sentiment all major growth forecasts for the world’s largest economy have been revised down.
Concerns over the health of the US economy is indicative of those concerning the global economy more generally. For example, April included two alarming warnings on the prospect of global growth from the IMF and World Bank given the war in Ukraine, persistent issues relating to the pandemic and concerns over soaring debt levels. As such, the IMF have revised their growth predictions for 2022 to 3.6%, down from their previous prediction of 4.4% in January in addition to lowering their forecast for 2023 by 0.2 percentage points. In a similar state of dejection, over April the World Bank also cut their global growth outlook for 2022 from 4.1% to 3.2% while Fitch cut theirs by 0.7 percentage points to 3.5%.
In the UK, data released over April saw UK unemployment rate fall to 3.8% (its lowest level since 1974), while job vacancies rose to a record 1.29m. In spite of the strong demand for labour, given CPI hitting 6.2% over February (and subsequently hit 7% during March), real wages fell at an annualised rate of 1.3% during that month. This came as the OBR forecasted a fall in real household disposable by 2.2% over 2022 - representing the greatest decline since records began in 1957. The disconcerting socio-economic climate prompted consumer confidence to fall to its lowest level since 2008, with such sentiment manifesting itself in disappointing retail sales which sank 1.4% between February and March, well below market expectations of a 0.3% decline.
Across the channel, the market reaction to the French election was more muted than the campaign itself vis-à-vis volatility, as Marine Le Pen appeared to be closing in on Emmanuel Macron. Nevertheless, the incumbent president took 58.55% of the vote against his rival’s 41.45% with a turnout of 71.9%. While this was much closer than the 2017 election (where Macron took 66.1% to Le Pen’s 33.9%), his success means that he is the first sitting president to be re-elected for a second term in 20 years. As he enters his next five-year term, his brand of liberalism, social democracy and Europhilia has provided Brussels with some level of ease relative to the possibility of Le Pen’s protectionist, anti-immigration euro-scepticism.
April has yet again been a month of great volatility in the world of foreign exchange and looking ahead this trend is expected to carry through into May where all eyes will be predominantly focused on the Fed and BoE’s next interest rate decisions, developments cornering the war in Ukraine and the Covid climate in China.
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