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Dollar rally continues as markets fear global growth slowdown

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27 April 2022

Written by
Matthew Ryan

Senior Market Analyst at Ebury, Chartered Financial Analyst. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Investor concerns surrounding a possible slowdown in global growth continued to dominate the narrative in the foreign exchange market on Tuesday, leading to further sell-offs in most risk currencies.

he Japanese yen and US dollar were once again at the top of the pack yesterday, as market participants sought safety in lower-risk investments. There wasn’t necessarily one identifiable catalyst for the move, with markets merely trading on the same fears that led to a sharp sell-off in risk assets on Monday – namely the ongoing lockdowns in China at their impact on global growth. That said, remarks from Chinese President Xi Jinping in the Wall Street Journal may have somewhat spooked investors. Xi is said to have told officials that he wanted Chinese economic growth to outpace that of the US this year. While this may seem a bit of a passing comment, the US economy is only expected to grow by around 3% in 2022, a hurdle that China would, under normal circumstance, surpass with total ease.

Among the major currencies, the euro fell below the 1.07 mark, ending London trading around the lowest level it has traded in the past five years. A confluence of factors have conspired against the common currency in the past few weeks. Risk sentiment has worsened, the war in Ukraine continues to rumble on with no signs of a resolution and the European Central Bank has largely stuck by its dovish rhetoric in recent official communications. ECB President Lagarde will be speaking again in Hamburg this afternoon, with markets set to watch closely for any comments on monetary policy that could spark some life into the euro. Until we see that long-awaited hawkish pivot from Lagarde, the common currency may find gains hard to come by.

Figure 1: EUR/USD (YTD)

Source: Refinitiv Datastream Date: 26/04/2022

Sterling has also dropped like a stone in the past couple of trading session. The GBP/USD pair made a march towards the 1.26 mark on Tuesday (a 21-month low), extending its sell-off to more than 3% since markets opened on Friday. A mounting cost of living crisis in the UK, and a surprising dovish turn from the Bank of England despite the inflation overshoot, is not providing a particularly attractive proposition to investors at present. There’s no real macroeconomic data of note out of the UK this week, so markets will likely already have one eye on the MPC’s policy announcement next week. While another 25 basis point rate hike is widely expected, the big uncertainty surrounds the bank’s view on the possible pace for additional hikes beyond next week’s meeting. This is shaping up to be a key event risk for sterling.

With concerns over future growth dominating the headlines, economic data has largely taken a back seat so far this week. Tuesday’s US durable goods order data was mixed although, on the whole, mostly encouraging. We may see some reaction in the dollar to Thursday’s first quarter GDP data, which is expected to show a relatively marked slowdown on the previous quarter, although risk appetite is likely to remain the main driver of currencies.

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