Daily FX 19.01.22: UK PM’s Vote Of No Confidence To Dominate Pound Vs Euro, Dollar
Markets on Red Alert for Central Bank Action as Oil Price Surge Intensifies Global Inflation Pressures
Inflation and global central bank policies will be extremely important in the short term, especially with a surge in oil prices to fresh 7-year highs fuelling further upward pressure on prices.
Central banks will also have to deal with uncertainty over Omicron developments and tight labour markets. Volatility is set to increase across all asset prices including exchange rates.
The Yen and Swiss franc are likely to be resilient, especially if equities slide further.
Pound US Dollar Exchange Rate Outlook
GBP/USD dipped to lows around 1.3575 before a tentative recovery and settled close to 1.3600.
The latest inflation data and a fresh surge in oil prices will ensure a further debate over Bank of England (BoE) policy. GBP/USD failed to gain further support from a 29-year high inflation rate of 5.4%.
Political events will also be important with Prime Minister Johnson remaining under severe pressure.
In this context, the House of Commons will be a major focus with Prime Minister Questions and testimony to the Treasury Select Committee from BoE Governor Bailey.
With weaker risk conditions and BoE rate hikes priced in, GBP/USD is unlikely to make significant headway ahead of next week’s Federal Reserve policy decision.
Euro (EUR) Exchange Rates Today
The Euro to Dollar (EUR/USD) exchange rate retreated sharply on Tuesday with lows around 1.1320.
The Euro was undermined by low yields and concerns over the implications of high energy prices.
A slide in equities could, however, provide some protection with a reluctance to fund carry trades through the Euro.
Comments from ECB speakers will continue to be watched amid speculation that the current stance is unsustainable.
MUFG expects some Euro support on valuation grounds; “The price action fits with our view that the EUR has become more deeply undervalued against the US dollar which is helping to dampen further downside risks in the near-term.”
The bank does, however, note geo-political risks; “One potential trigger for a weaker EUR in the month ahead is posed by rising geopolitical tensions between Russia and the West.”
US Dollar (USD) Exchange Rates Outlook
The dollar posted significant net gains on Tuesday with a strong focus on yields and Federal Reserve policy.
There were strong expectations that the Fed would have to tighten aggressively and 10-year yields increased to a fresh 2-year high.
Higher yields were important in underpinning the US currency and there is likely to be a reluctance to sell the currency into next week’s meeting.
MUFG still expects the dollar can make further short-term gains in the short term before fading later in the year. “We still expect EUR/USD to trade closer to the 1.1000- level in Q1 before drifting gradually higher later this year.”
The Canadian dollar was again supported by strength in oil prices and expectations of a rate hike by the Bank of Canada.
The Pound to Canadian dollar (GBP/CAD) exchange rate retreated to 1-month lows just below 1.7000 before stabilising.
The New Zealand dollar recovered some ground on Wednesday and the Pound to New Zealand dollar (GBP/NZD) exchange rate retreated from a 17-month high near 2.0150 to 2.0040.
The Swedish krona was undermined by expectations of a dovish Riksbank stance and weaker risk appetite with the Pound to Krone (GBP/SEK) exchange rate hitting a 21-month high just above 12.40.
The slide in equities supported the yen with the Pound to Yen (GBP/JPY) exchange rate dipping to 2-week lows around 155.50.
The Day Ahead
Canada will releases its latest consumer prices data which will have an important impact on expectations surrounding next week’s Bank of Canada policy decision with futures markets indicating that a rate hike is likely.
There are no major data releases from the US or Euro area, but it is unlikely to be a quiet day. The sharp global moves in equities and oil prices will have an important impact on exchange rates.