Last week was dominated by the ECB’s 25bp rate hike and the publication of the US CPI. US inflation remains relatively stable and markets are now starting to believe the “longer higher” story. Conversely, the ECB raised interest rates by 25bp but revised inflation and growth forecasts lower.

The US dollar rose further and remains the “least dirty shirt” of the 4 major currencies. Last week, the DXY index rose 0.3% and closed at 105.331.

The euro reacted badly to the ECB’s hike, as it is now very likely that they are done raising interest rates. The EURUSD fell 0.4% to 1.0659 and appears to be heading for support at 1.05.

Sterling was hampered by disappointing employment and GDP figures. GBPUSD fell below 1.24 for the first time in 3 months and EURGBP closed above the 0.86 level.

Commodity currencies had a constructive week after a long period of declines, mainly due to the oil rally. NZD rose 0.2%, AUD and CAD rose almost 1%, but NOK underperformed with a 1% loss. Elsewhere in FX, JPY remained flat, CHF fell 0.5% and MXN had another rockstar week with a gain of almost 3%.

Oil continued its rally as the market remained tight and supply cuts were extended. Last week, WTI rose 4.6% and closed at 91.17.

Precious metals had a decent week, especially given higher yields and the dollar. Last week, gold and silver both rose about 0.5% and closed at $1,924 and $23.03, respectively.

Equities had a relatively quiet week as markets tried to determine what effect longer higher inflation would have on risky assets. The S&P500 index fell marginally to 4450 points last week and the DAX rose 0.9% to close at 15877 points.

Bonds sold off for another week but are now at key support. Last week, US 10-year yields rose 6bps to 4.32% and the 10-year Bund fell 0.5% to 130.226 points.

Finally, cryptocurrencies consolidated for another week and we are now waiting for the next big move. This move will depend on the general direction of risk assets, and technically it seems more likely to be downward. At the time of writing, Bitcoin is 2% higher at $26,500 and Ethereum is generally flat at $1,640.

The week ahead:

The week ahead will be very important, with the FOMC’s interest rate decision taking centre stage. Markets expect no change, but the question remains whether they will announce an increase at the next meeting. We also have interest rate decisions from the BoJ, the BoE, the SNB and Norges Bank, and inflation data from Canada, the Eurozone and the UK.

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