April Review

April was a month of record-low volatility. In the past two years, the only time volatility on EUR/USD has been lower is during the Christmas period when there is a global downing of tools.

Of course, the Easter break and other upcoming holidays in the UK may play a part in this, but even then, things have been unusually quiet in markets. On interbank FX markets, GBP/EUR and GBP/USD have been strictly range-bound, between 1.1250 – 1.1350 (0.8%) and 1.2300 – 1.2550 (2%), respectively - yawn.

Despite this low volatility, however, we have seen some decent rallies in equities over the period. The tech industry, in particular, has defied the ‘earnings apocalypse’ with better-than-expected Big Tech Q1 earnings. The results sparked a bounce in the Nasdaq 100 Index which grew by 2% last week alone.

May Outlook

May, however, is already shaping up to be a much more interesting and volatile month with the US Federal Reserve meeting on Wednesday 3rd May, the European Central Bank meeting on Thursday 4th May, and the Bank of England meeting on Thursday 11th May. Throw into the mix the normal UK, European, and US economic data figures, with a heavy focus on UK and US inflation, and we are very likely to see considerable volatility this month.

To understand the expected next move of each central bank and the resulting FX market reaction, see below:

Wednesday 3rd May - US Federal Reserve

The markets predict a likely outcome of a 0.25% rate hike with 96% certainty (Source: CME Markets). The other option is a pause in rate rises which is possible given the recent softening among US inflation.

What might we see in the market?

The US Dollar has been weakening since October 2022 due to the slowing of interest rate hikes in the US. We’ve seen unprecedented gains this side of the Atlantic, with the pound gaining 14% against the dollar and the euro gaining 15%. 

Further slowing/stopping of rate hikes could further weaken the USD, while an unexpected large hike or hawkish comments on future rate hikes could strengthen USD.

Thursday 4th May – European Central Bank

Markets predict a 0.25% rate hike from the ECB on Thursday, but there is also potential for a more significant 0.50% rate hike due to high inflation in the EU.

What might we see in the market?

The ECB has been vocal about waiting for inflation to decrease before they consider pausing rate hikes; as such, the euro has been strengthening in part due to hawkish comments from ECB officials.

Further hawkish comments and larger rate hikes could strengthen EUR, while a perceived cooling of their tone could weaken the EUR significantly.

Thursday 11th May – Bank of England

Again the markets are predicting a 0.25% rate hike but with a potential larger 0.50% rate hike due to high inflation in the UK still on the cards.

What might we see in the market?

The pound has been in good form, mainly buoyed by the higher inflation figures leading to traders increasing the potential of greater interest rate hikes than previously expected. But recent weaker data has made the BoE’s job far trickier as they attempt to balance reducing frothy core inflation by hiking rates against a broadly weak economic backdrop.

The Bank of England’s recent slower pace of interest rate hikes have put the pound on a similar footing to USD. And although the pound continues to hold with surprising strength, despite the less-than-favourable data recently, slowing/stopping interest rate hikes in the UK could be very damaging for GBP. In contrast, a larger rate hike could be broadly positive for GBP.

What else are we keeping an eye on this month?

• Last night, the Reserve Bank of Australia surprised the market with a 0.25% rate hike, which has helped boost the currency.
• The Bank of Canada has paused its rate increases for the time being due to its weakening economy. The move has seen the currency drop against the dollar.
• The weakening Yen has accelerated since the Bank of Japan’s initial Ueda-led meeting last week. This can be put down to its ongoing commitment to Yield Curve Control (YCC), which involves targeting a longer-term interest rate and buying or selling the necessary bonds to reach it. This is a vastly different approach to the Fed, ECB, and BoE, which have favoured a quantitative easing approach – which targets bonds of varying maturities.

All data sourced from Bloomberg unless otherwise stated