The Euro has edged upwards in recent days as the situation in China relaxes a little and the sensitivity to the Ukraine/Russia situation settle down a little. This combined with a less pessimistic view of the potential rise in US interest rates has favoured the Euro and indeed Sterling. Sterling was also heled by the recent £15 billion fiscal package softening the cost-of-living issues faced by all. Currencies remain vulnerable to the global outlook however which is increasingly uncertain and thus volatility is here to stay.

The US dollar is definitely benefiting from the adverse risk scenario we are all feeling, and with Sterling under pressure due to political instability we are seeing rates reach their worst position for some years. The Euro will be supported by the ECB over the coming weeks with interest rises more or less guaranteed for July. But we are approaching US dollar parity which is incredible.

The Ukrainian-Russia situation still dominates international markets. With the US seeing increasing inflation there is some sentiment for a half percentage point interest rate hike which will assist keeping the US dollar firm. In the UK weak data, escalating inflation, and liquidity challenges brought on by rising prices has weakened Sterling. The UK is also performing worst in the global trade recovery where our exports have declined 14% against a global recovery of over 8%, The UK is the only country that has not recovered to pre pandemic level of exports, a symptom of Brexit.

Obviously, the situation that developed in Ukraine last week is and will continue to have a major impact on foreign exchange markets and equities. This volatility will remain for some time, although to date the impact has been relatively minimal bearing in mind the financial sanctions imposed on Russia. Fundamentally the Euro has taken the worst of the adjustment, followed by Sterling as funds move to safe haven currencies, in particular the US$. This will cause imports to increase price, although of course, exports will show some foreign exchange weakness to counteract the adjustment somewhat. It is very hard to see this situation change in the coming months.

Since the beginning of the year the US$ has strengthened slightly but largely rates have stayed stable. It is well established that interest rates will increase during 2022. In the USA the Federal reserve advised they expected to implement three increases through the year, and the EU/UK banks will almost certainly follow suit. Indeed, the Bank of England has indicated rates will go up first week of February.

The obvious concerns of the economic impact of the new variant have probably removed the risk of increased interest rates early in 2022, since the economic shock and risk of further lockdowns or escalating cases. But high inflation rates are leading to increased pressure for pay rises and whilst there appears little chance of these reducing, with Omicron adding further pressure to supply chains & labour shortages.

Currency update Currencies are moving around against each other currently as discussions regarding interest rates, Covid support programs and inflation continue. There is criticism over the Central European bank for letting inflation increase unchecked by interest rate hikes, whilst the Bank of England is expected to increase interest rates at the next meeting. [...]

Sterling has taken a hit in the last few days dropping 2% the biggest daily fall this year. The economy grew quarter on quarter by 5.5%, but now fuel shortages, energy supplies, future taxes increases, escalating prices and the end of Furlough drag on the pound. The solution perhaps is to increase interest rates, but this will add to the cost of UK Government debt servicing, which would not be good news.