An uncomfortable week ahead for sterling

World Markets

Another dramatic week in the financial markets came to a close with both sterling and the euro off their worst levels against the dollar but still sharply lower than they had started the week.

As is so often the case, there was not one trigger to the selling pressure but more a combination of decreasing risk appetite and, in sterling’s case, poor economic data and fears over inflation. Sterling has endured a torrid time over the last four weeks and is now nearly ten cents lower than it was trading in mid-April. It is not only sterling that has suffered; indeed, the Dollar Index is trading at twenty-year highs reflecting the general nervousness in the world’s markets. Much of the fear emanates from the US and is reflected in the moves on Wall Street. The Federal Reserve reaffirmed its commitment to less accommodative policies last week, with interest rate rises and quantitative tightening to come. With easy money drying up, the deleveraging of risk assets continued and will do so for some time.

Sterling is in a tricky position with an almost textbook combination of factors conspiring against it. The UK’s Gross Domestic Product figure, released last Thursday, showed sluggish growth and is possibly as good as it’s going to get. With poor GDP combined with high inflation, a hesitant central bank and domestic political problems, it is no wonder that sterling has been on a slippery slope. The week ahead could see more problems for the UK and sterling with a raft of economic data released on Tuesday and Thursday reporting on inflation and employment. Away from the UK, it looks relatively quiet week on the data front. Still, after Friday’s disappointing data in the US showed consumer confidence deteriorating, the Retail Sales figures also released on Tuesday will be studied more closely than usual. Unfortunately, it looks like another volatile week ahead, so buckle up and hang on to your hats!

GBP: As we said earlier, Sterling has been under the cosh against King Dollar, but it has just about held its own against the euro. Whether it can maintain this strength against the single currency will be sorely tested with the UK’s inflation and employment data due. The first data reports are scheduled for tomorrow morning when unemployment data is released. Usually, a drop in unemployment is a positive for sterling, but against a tight labour market pushing wages higher, this is not the case at the moment. The jobs data is followed on Wednesday by inflation data which is expected to show no let-up in its rise and is forecast to touch 9% in this week’s figures. A figure of this magnitude will give the Bank of England a headache as they have made it clear they don’t wish to tighten aggressively. The financial markets disagree, and according to the weekend press, so do politicians. This afternoon four members from the Bank of England’s Monetary Policy Committee, including Andrew Bailey, will face a grilling from the Treasury Select committee. The answers they provide may set the tone for sterling’s week. Retail sales are also released this week on Friday, which are likely to add to the gloom surrounding the pound. Also of concern will be the machinations playing out in the background politically between the EU and the UK over the Northern Ireland protocol. Still, it is hard to ascertain how many threats are just sabre-rattling.

EUR: The euro is trading near the bottom of its recent range and bouncing around its lowest levels since 2017, with analysts including JP Morgan, HSBC and Royal Bank of Canada forecasting that it will touch parity against the greenback. Indeed, data from the currency options market, collated by Bloomberg, now assign a 60% chance of parity being hit within the next year. The euro is still suffering from the policy divergence between the European Central Bank and the Federal Reserve despite policymakers’ repeated suggestions to raise rates in the eurozone in the summer. It’s an interesting week ahead for data. The estimate for the first quarter eurozone Gross Domestic Product and employment are released on Tuesday, and inflation data for the bloc on Wednesday. Also of interest will be the minutes published on Thursday from the last ECB meeting and the Producer Price Index on Friday. As with the UK, the post Brexit row may harm the euro as the last thing either currency needs now is a trade war, especially with a real war on its doorstep already pushing inflation higher.

USD: The dollar has recently had analysts, commentators, and economists searching for superlatives, and last week was no exception. With the Federal Reserve set on a seemingly unswerving course to tighten policy with upward moves of at least 50bps at its next three meetings, it is hard to bet against the dollar. As we said earlier, investors are searching for safe havens for their money; as investors leave risk assets, the dollar’s rise looks assured. The only possible hiccough is that the world has been consistently buying the greenback, and at some point, profits will need to be taken. Retail sales are released tomorrow afternoon, which are forecast to show that domestic demand remains strong and that, unlike in the UK, there is no squeeze on spending power. Industrial Production, also released tomorrow, is forecast to stay strong. The Housing Data out on Wednesday will possibly be more interesting to see if the impact of rising mortgage rates is taking their toll, and the weekly jobs data on Thursday will be watched to see if last week’s data was a blip. There are also plenty of spokespeople from the Federal Reserve this week, with the most important being Jerome Powell tomorrow afternoon when another hawkish interview is expected.