Last week, the moves in EURUSD and GBPUSD to new 1-year and 10-month highs respectively, indicate that the financial markets remained more concerned by the squeeze on the US economy than other major economies. The USD sell-off was helped by signs that some members of the FOMC (Federal Open Market Committee) were arguing for caution in March, a split that is likely to have deepened subsequently, as signs of further trouble in credit availability and macroeconomic weakness emerged. There were some reasons for the EUR and GBP to rally on their own economic data and surveys. EURUSD hit a high of $1.1076 last week, and GBPUSD a high of $1.2546, but subsequently came back under pressure on relatively flimsy macroeconomic evidence, in my opinion. GBP fared less well than the EUR, with GBPEUR slipping back from above €1.14 at the start of last week, to just above €1.13 by the end of the week. 

This week the GBP and EUR have some domestic influences to potentially drive moves, but there will still be a lot of interest in US releases, particularly the latest Federal Reserve assessment of macroeconomic conditions. If the pressure on the USD resumes, EURUSD might still run into resistance around the $1.1105 region, and GBPUSD in the $1.2575/80 area. There are undoubtedly likely to be surprises amongst the data and survey releases, but are they likely to be sufficient to materially alter interest rate expectations? 

Last week’s key releases included the April forecast update from the IMF (International Monetary Fund). The new forecast lowered estimates for 2023 and 2024 global growth marginally, and that was despite upward revisions to US, UK and Euroland growth in 2023. The IMF also warned of a hard landing for most economies if monetary policy was tightened too aggressively or inflation remained ‘sticky’. The warnings over recession were repeated by the Fed’s staff forecasts, revealed in the March Fed meeting minutes, which predicted the US would go into a mild recession, an assessment the White House vehemently disagreed with. The macro data from the US recorded weakness in headline CPI (Consumer Price Index) inflation, a far larger-than-expected US budget deficit figure for March, lower producer price inflation and another contraction in headline retail sales values, also in March. The only notable release from Euroland was a more robust-than-expected industrial production outturn for February, and from the UK calendar, it was limited to a stagnation in output according to February monthly GDP (Gross Domestic Product) data. 

This week, the UK is centre stage. There are the releases of labour market figures for February/March on Tuesday, March inflation data on Wednesday, and April GfK (Growth from Knowledge) consumer confidence figures, March retail sales data, and provisional April manufacturing and services PMI (Purchasing Managers' Index) indices on Friday to look forward to. Is the UK labour market still shedding full-time jobs? Will consumer price inflation drop sharply in March after the surprise rise in February, and are retail sales volumes set to drop in March, after the surprise strength in February? The risks are likely for a weaker set of activity figures, and weaker inflation, all of which should argue that the BoE (Bank of England) would be wise to refrain from another hike at the May MPC (Monetary Policy Committee) meeting, in my view. 

Global central banks are reaching an end of the monetary tightening cycle that has been underway for the best part of 2 years. What began in Eastern Europe and spread to emerging markets in terms of interest rate hikes eventually prompted major central banks to tighten also, as realisation dawned that inflation was less temporary than previously forecast. However, after one of the most aggressive tightening cycles seen since the 1970s, most central banks are now close to, or have already reached their peak. 

So, the question for financial markets is what comes next? Will some central banks start to cut interest rates, or will there be a prolonged period where interest rates remain at current levels? I am concerned by the decline in money supply growth, especially as much of the monetary tightening is yet to feed through onto either the personal or business elements of economic balance sheets. The next few months of meetings from central banks should give markets a clue as to which direction authorities plan on taking, but the risks are that global events overtake them. As for FX markets, this period of relative calm is no reason for complacency, with more uncertainty of the risk as we head deeper into 2023, in my opinion.