RBA raises rates and signals more to come

Central banks will dominate everybody’s thinking this week and we kicked off with a 25 basis point interest rate rise from the Reserve Bank of Australia. That lifted their base rate to 0.35%; a small change, but more of a signal really they all prepared to try to contain inflation whilst desperately trying to avoid stifling any kind of recovery. Directions lifted the yield on Australian three-year bonds and, in turn, lifted the value of the Australian dollar. GBPAUD is down 2 cents from the weekend high but we have seen some GBP support bringing this pair back up to AUD 1.7650. The pattern for the rest of the week will hang off the Bank of England’s decision on Thursday.

BOE expected to hike to 1%

And speaking of the Bank of England, we can expect them to raise their UK base rate to 1% on Thursday. It looks as though the markets have priced that decision into their thinking but the statement from the BOE will be the clincher as far as Sterling strength is concerned. I don’t think there’s any doubt that the Bank of England will be making further interest rate increases in the months ahead, but any clues to that in their statement will cause investors’ hearts to flutter and may well impact the value of the pound. The GBPUSD rate starts Tuesday at $1.2550; up 1.25 cents on Thursday’s low. GBPEUR is a little less elevated, but that is still hovering around €1.1925.

US Fed rate hike imminent but USD takes a breather

The US Federal Reserve’s Open Market Committee begins a two-day meeting today, where they are considering the US base rate and other monetary policy matters. It appears to be a foregone conclusion that they will raise the US base rate on Wednesday and the markets have priced in a rise to 1.0% from the current 0.5%. As with other central banks, the real issue is whether they talk about further rate hikes and discuss the pace and timing of those changes. So the statement issued by the Fed will be the deciding factor in where the US dollar ends the week. It isn’t the only factor of course; events in Ukraine and the impact that Russian sanctions are having on commodity prices will also affect the US dollar, as might Friday’s US employment data. All in all, we can expect the dollar to be volatile this week. The GBPUSD rate is mentioned above but the EURUSD rate is a little flatter at $1.0527; barely above the 20-year low.

Euro weaker ahead of Lagarde’s speech

The Euro is starting the week on the back foot after a 2.7% drop in German retail sales and ahead of the speech from the president of the European Central Bank, Christine Lagarde. There is a lot of talk about the damage the Russian sanctions and the switching off of gas supplies are having on the EU economy. There are other impacts too; i.e. before the invasion, Ukraine was a large-scale exporter of sunflower oil and that loss of output is affecting other food oils. That’s just one example of the economic problems Russia’s aggression is having in the eurozone. It will be very interesting to see what, if any, plans the European Central Bank has to assist the region’s governments in supporting the economy. They are likely to want to keep rates low but they are laggards when most other central banks are on a tightening cycle.

NZ employment data awaited as NZD weakens

The support for the Pound has shown up quite strongly in the GBPNZD rate. That pair is up to NZD 1.9515 this morning; the rise is a continuation of the trend that started in the third week of April. The current exchange rate is on a par with levels we saw at the start of March and that upward trend could well continue unless the New Zealand unemployment rate, which is due for release tonight, falls below the current 3.2%. That quarterly rate is already the lowest on record, which is remarkable when you consider the extended lockdown New Zealand suffered over covid. This could also be very helpful to those wishing to move to New Zealand because such a low unemployment rate would suggest there are gaps that will need to be filled by immigration. Anything below 3.2% should strengthen the Kiwi Dollar.

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