This week was forecast to be an extremely volatile week, and it certainly did not disappoint! Major news for the US, UK and Eurozone meant that this week was always going to be a point of real contention between the G3 as they vie for the top position in the currency markets. The collapse of the Silicon Valley Bank over the weekend and serious concerns over Credit Suisse ensured that this week would be the most important week, potentially, of the new year so far. As well as this, it completely changed the dynamic of power between the G3, with Sterling seemingly coming out on top. The SVB’s collapse began a difficult week for the USD, leaving the Fed with an extremely difficult decision as they attempt to continue battling inflation, but with increased interest rates now beginning to have real effect on their overall economic health, how best to proceed? Many forecasts increased the chances of the Fed hiking by 25bp from 20% up to 90%; however, a number of major banks, most notably Goldman Sachs, have now thrown their support behind holding steady at their next decision. On the 22nd of this month, the Fed will put us out of our misery when they announce the next base rate decision, perhaps the most difficult one for Jerome Powell and co yet. The damage this will do to the USD long term is likely to be minimal, with the USD expected to bounce back.

The ECB made their latest interest rate decision yesterday afternoon, opting for a 50bp hike, a surprising decision considering their more dovish tone as of late, as well as a slowing economy. Following that decision, the ECB press conference left more questions than answers, with them evading being drawn into any questions regarding their monetary policy moving forward and alluding to the fact that from now on, it is likely to be data-driven. Following this decision and with background concerns, EUR has weakened against both GBP and USD this week. Developments surrounding the Swiss bank (whose shares are down 10% at the start of trading today) will likely be a point of contention for the EUR moving forward.

Sterling has been the real winner this week, with it gaining against most major currencies, most notably NOK, which is trading at its highest point since April 2020. Jeremy Hunt announced his latest budget on Wednesday, which was broadly (and perhaps surprisingly) well-received. It had been expected that following this, we would see a sharp drop in Sterling; however, Hunt’s comments that he doesn’t envisage the UK to see recession this year, appear to have propped up the Pound, which saw only a marginal dip and recovered quickly. Realistically, the Pound has gained ground this week more due more to outside circumstances than anything the UK economy has shown us, but I highly doubt Andrew Bailey will be complaining. Next week we will see the latest monetary policy decisions in both the UK and the US. With it becoming an increasingly difficult economic landscape to navigate, both the decision and any comments following their decision will be closely analysed by traders. Therefore, I envisage another week of extreme volatility.