Risk assets were steady to higher worldwide last week, as markets price in a modestly lower terminal rate from central banks and yields fall.
Markets seem to be giving UK Prime Minister Sunak the benefit of the doubt on his promises to stabilise government finances, and the pound outperformed all its G10 peers to end up significantly higher against the dollar. The euro managed a middling performance, in spite of marginally dovish rhetoric from the ECB, while US economic data and corporate earnings came out on the bearish side, cementing the view that the Fed pivot to a wait-and-see attitude may not be too far in the future.
This week will be a crucial one for currency markets, and financial markets in general. The Federal Reserve meets on Wednesday, followed by the Bank of England and Czech National Bank on Thursday. The Fed is expected to hike another 75 bps, as is the Bank of England, while the CNB should remain in the wait-and-see mode.
However, the key will be the accompanying communications to markets. Central banks in Canada and Australia already have shifted to a slower pace of hikes, so we would not be surprised to see Fed officials leaning that way. The Bank of England is different in that a lot depends on the as yet undefined details of Sunak’s fiscal plans. Today’s Eurozone flash CPI data, and the US payrolls report on Friday, round up an unusually busy week for currency markets.
Read the full G10 Report here.