There is no excerpt because this is a protected post.
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.
The news from the US of increasing inflation and soaring Covid cases, combined with limited further economic stimulation and low consumer confidence is allowing the US dollar to weaken against other currencies. In Europe inflation is also on the increase with problems in the blocks two major economies. In France inflation is above the blocks target rate and in Germany, factories are operating below pre-Covid levels, with car manufacturing particularly badly hit. Germany also has a political transformation coming with the end of the Merkel era within the month. The new chancellor will have to manage a surge in inflation combined with a drop off of demand and decide if this is simply a delay in demand or business lost.
The steady strengthening of the US dollar came to an end this week and gains were largely reversed as data from the US indicated growth was slower than expected, jobless figures continued higher than expected. The Fed’s decision not to ease their asset purchase scheme also bore on the dollar. The pound is supported by positive Covid news and Brexit news/performance, against the Euro which is currently concerned about the inflation rate for the remainder of 2021.
The supply chain challenges continue to be the major factor influencing things. Freight rates are still climbing, congestion and container supply issues are spreading over to South/Central America now and all supply chains are lengthening. It is a precarious situation, and ultimately increasing costs significantly. We do not expect the situation to improve before 2022. As an indicator, freight from China has increased over 1000% in six months, from $1000/fcl to $ 12000. This adds $ 500/mt for products from this region.