Businesses cover Euro exposure in advance of Eurozone inflation figures
29/Mar/2016 • Currency Updates•
Financial and currency markets were traditionally quiet during the Easter week.
Many businesses are using this current calm to hedge their Euro exposure and avoid post-holiday volatility. One driver behind this is Thursday’s Eurozone inflation release, which may prove a downside risk.
Businesses with Euro/Dollar exposure have been particularly proactive in mitigating their risk given the US jobs report released this Friday could maintain its recent trend and strengthen the US Dollar.
As has been the case for some time, we believe that G10 currencies will be driven almost exclusively by two factors:
- Firstly, central bank decisions and in particular the timing of Federal Reserve interest rate hikes in 2016.
- Secondly, political risks. The most obvious case is the Brexit referendum but political uncertainty is also rising in the Eurozone.
The rally across most emerging market currencies took a breather last week but their cheap levels make us confident that the rally will recommence over the coming weeks.
Major currencies in detail:
As last week’s inflation and retail sales held no surprises, Sterling continued to be driven by the odds of Brexit.
The consensus view is that the Brussels attacks may increase the chance of an ‘out’ vote at the upcoming EU referendum and the Pound was negatively affected as a result. Brexit odds in betting markets moved up to around 30% but in the coming weeks we would expect this to retrace and Sterling to strengthen.
At any rate, Brexit polls will continue to provide the best indication of Sterling moves, at least in between Bank of England meetings.
The ECB has failed to meet its own inflation targets for eight years running and its own forecasts have essentially given up predicting when inflation will return to target.
As pressure builds on the ECB, the monthly inflation releases in the Eurozone are becoming increasingly critical. This Thursday’s release takes on added importance, particularly given the shocking downside surprise we saw last week.
Another negative inflation surprise will lead markets to expect further cuts in the deposit rate and will weigh heavily on the Euro.
As in the Eurozone, the inflation release date in the US is starting to overshadow the labour report as the main source of guidance for markets and the Federal Reserve.
The inflation data released yesterday was slightly weaker than expected but at 1.7% core expenditure inflation, which strips out the volatile food and energy components, remains within striking distance of the Fed’s 2% target. This makes the Federal Reserve somewhat unique and inflation is a key reason why it is the only major central bank in the process of hiking interest rates.
That said, Friday’s payroll report remains key for the US Dollar.
Over the medium term, the key drivers for the US Dollar are communication from Federal Reserve officials clarifying the ambiguities of the March statement, as well as the progress of core inflation towards the Fed’s 2% goal.
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