Month-End Flows Will Exacerbate Volatility In Pound Vs Euro, Dollar


Month-End Flows will Exacerbate Volatility across Major Exchange Rates

Market volatility is likely to remain higher in the short term, especially with major uncertainty across all asset classes.

The potential for big moves will be exacerbated by month-end position adjustment and capital flows associated with the closing of the Japanese fiscal year on March 31st.

The Ukraine peace talks will be watched closely with talks due to be held in Turkey and positive rhetoric could support the Euro, although expectations of progress remain very low at this stage.

Trends across energy and commodity markets will also remain a key focus during the day.

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Pound US Dollar Exchange Rate Outlook

The Pound to Dollar (GBP/USD) exchange rate was unable to make any headway on Monday and gradually lost ground to trade below 1.3100.

Overall confidence in the UK outlook remains fragile with the surge in energy costs set to have an important impact.

Bank of England Governor Bailey noted that the economy faced a very high degree of uncertainty and also warned that the energy shock will be larger than any year in the 1970s.

The rhetoric overall triggered fresh doubts over the scope for more than limited further interest rate increases which curbed support for the pound.

GBP/USD dipped to 10-day lows near 1.3070 before a correction to 1.3100. Any dollar retreat would provide relief but, given fragile Sterling confidence, GBP/USD will find it difficult to secure more than a limited recovery at this stage.

Euro (EUR) Exchange Rates Today

There was choppy trading in the Euro to Dollar (EUR/USD) exchange rate as the yen was subjected to very high volatility.

EUR/USD tested the 1.1000 level, but was unable to break above this level and settled just below this level on Tuesday.

Overall confidence in the Euro-zone outlook remained fragile, although there was some relief from the sharp decline in oil prices.

Overall yield spreads will remain important for currency markets.

Markets continue to expect a series of rate hikes by the Federal Reserve. The ECB will also be in focus, especially with the latest Euro-zone CPI inflation data due on Friday.

The headline Euro inflation rate is forecast to surge to a fresh record high of 6.6% from 5.9% which will increase demands for higher interest rates from ECB hawks at the April policy meeting.

Scotiabank still sees limited scope for Euro support; “We remain skeptical that the EUR can maintain gains ahead of (or following) the ECB as market expectations of two hikes this year are already the maximum by which the bank would hike – and there remains a lot of room for disappointment. Hawkish Fed expectations seem less likely to be disappointed.”

The bank adds; “We see the EUR/USD weakening toward 1.08 in the coming months, with the move probably waiting until after the ECB’s decision.”

US Dollar (USD) Exchange Rates Outlook

The dollar overall has continued to post net gains in global currency markets and the currency index traded close to 22-month highs during Monday before a slight correction.

The main focus was again on the yen with the Dollar to yen (USD/JPY) exchange rate briefly surging to a fresh 6-year high above 125.00 before a retreat to 123.50.

The Bank of Japan will continue to engage in open market operations to cap domestic bond yields and yield spreads will remain negative for the Japanese currency.

There will, however, be speculation over intervention to curb further losses and capital repatriation ahead of the fiscal year-end will also offer potential yen support.

Overall, the dollar could edge lower over the next few days.

Other Currencies

The yen was subjected to very high volatility on Tuesday with a further and aggressive slide in the currency before a sharp correction.

The Pound to yen (GBP/JPY) exchange rate surged to 6-year highs above 164.00 before a slide to below 162.0 on Tuesday.

Commodity currencies struggled to make headway as prices for key commodities corrected lower.

The Pound to Australian dollar (GBP/AUD) exchange rate dipped to fresh 14-month lows around 1.7430 before a slight recovery.

The Pound to Canadian dollar (GBP/CAD) exchange rate retreated to fresh 29-month lows near 1.6365 before a tentative net correction.

The Pound to New Zealand dollar (GBP/NZD) exchange rate managed to resist a further retreat to new 4-month lows and traded around 1.8975.

The Day Ahead

There are two US data releases on Tuesday, but there is unlikely to be a change in narrative surrounding the outlook with markets continuing to monitor inflation trends and rhetoric from Federal Reserve officials.

Trends in energy prices will be important for global markets, especially for commodity currencies.

Developments surrounding the Ukraine conflict…



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