Calmer waters, volatility low for now

Calmer waters, volatility low for now.

The currency markets have been relatively stable in the last two weeks, with volatility at its lowest point since the Ukraine war began in February 2022.
Here’s a breakdown of what’s been happening with the major currencies and the factors affecting them:

Pound Sterling (GBP)- positive and negative.

  • The pound has been caught between some positive and negative forces that has kept its range bound within a 1.3% range in the last month.
  • On the positive side, the UK economy has escaped a short, shallow recession with the fastest growth recorded since 2021.
  • However, the BoE (Bank of England) is edging closer to a summer interest rate cut, possibly as soon as at their next meeting, scheduled for 20 June. This is making investors cautious about the pound.

Euro (EUR) – Modest gains.

  • The euro has seen some modest gains against the US dollar recently, but these gains are likely to be limited.
  • The ECB (European Central Bank) is also expected to start cutting interest rates in the summer, possibly as soon as at their next meeting scheduled for 6 June, but similar to the BoE, they are likely to take a cautious approach due to inflation.

US Dollar (USD) – Steady.

  • The US dollar has been mostly steady in the past two weeks.
  • Recent US economic data releases are all pointing towards a slow down in the US economy and thus increasing the odds the FED (Federal Reserve) may stand still and leave any interest rate adjustments until much later in the year than was forecast at the start of 2024.

Here are some of the broader economic and political factors affecting the currency markets:

  • Interest Rates – decision: Central bank interest rate decisions are a major driver of currency markets. Investors are looking for clues about the future path of interest rates, which can impact currency valuations.
  • Inflation – concern: Inflation remains a concern for many countries, and central banks are trying to balance raising rates to combat inflation with avoiding slowing down economic growth.
  • Geopolitical Events- volatility: The ongoing war in Ukraine and other geopolitical tensions especially in the Middle East always creates uncertainty in the markets, which can lead to increased volatility in currency markets.

Overall, the currency markets have been relatively stable in the last two weeks, with economic data and central bank policy decisions being the key drivers of market sentiment.

Next week sees a raft of economic data releases. The most notable includes the latest inflation data from Germany and the US, the latest employment data from the UK on Tuesday, EU GDP data on Wednesday and EU inflation data on Friday.

Calmer Waters, Quote of the day

Michael Caine “Be like a duck. Calm on the surface, but always paddling like the dickens underneath.”

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