Can the pound sustain its rally?


The markets finally woke up to the fact that the Federal Reserve will no longer bail the stock markets out with easy money after Jerome Powell’s speech last Tuesday.

Having constantly warned participants that the Federal Reserve was serious about rapidly increasing the cost of borrowing, the penny finally dropped, and Wall Street led the rest of the world’s stock markets sharply lower. The falls initially had the impact of pushing the dollar higher, but by the end of the week, the money leaving riskier assets sought the safe haven of US bonds and yields eased. As yields eased and fears of a recession grew, the dollar pulled back. Sterling had an eventful week with what some saw as an MOT of financial data for the UK economy published. The figures revealed that the jobless rate is at its lowest level for nearly 50  years; however, wages are rising to add to fears of an income spiral that will fuel already high inflation. Price rises were a smidgen easier than forecast whilst consumer confidence was much lower. At least the great UK shopper is doing their bit, helping Retail Sales be more robust than expected!

This week the UK has a well-deserved rest from being the centre of attention for economic data, but the pound may well stay at the forefront of traders’ minds. After a good bounce last week, the momentum has continued this morning. However, Boris Johnson is not entirely out of the woods over partygate despite avoiding the embarrassment of a further fixed penalty notice for Covid lockdown breeches. The long-awaited Sue Gray report will be published this week and may embarrass him and the government further. The ongoing problems with the Northern Ireland Protocol are also starting to worry the markets, and with a trade war threatened, sterling may begin to lose some of its newfound shine. The key events in the coming days look to be centred around US data and the minutes from the last Federal Reserve meeting. With volatility still at heightened levels, it seems sure to be yet another week where we witness larger and more unpredictable currency movement than usual.

GBP: A wild week for sterling ended with it rallying strongly, which it has continued to do this morning. It is now over three cents better against the dollar and nearly a cent better against the euro than a week ago. With the economic data released last week pointing toward a period of stagflation and potential political upheavals in the background, it is somewhat surprising that sterling has performed so well. It may be explained by traders and investors being overly short of the pound, as was evidenced by figures released for the derivative markets last Monday. The statistics revealed that traders such as hedge funds were unusually four times shorter of sterling than they were long. The only significant data releases are the preliminary Purchasing Managers Indexes for Manufacturing and Services tomorrow morning. The services element will be the most closely studied, with consumer confidence collapsing as the cost-of-living crisis takes hold.

EUR: Last week, the euro dragged itself off the floor after more hawkish than expected minutes from the last European Central Bank meeting were published. The single currency was also helped higher by statements from ECB council members, the most noteworthy comments coming over the weekend from Christine Lagarde, who said the first rise in rates for over ten years might come in July. Earlier in the week, Klaas Knot had said that a .5% rise was not out of the question, although that still seems unlikely. During the week ahead, there will be plenty of opportunities for policymakers from the ECB to air their views starting tomorrow with Christine Lagarde again. On Wednesday, Fabio Panetta, Klaas Knott and Phillip Lane are all slated to take the microphone. This week is relatively light on the data front, the highlight being the Purchasing Manager’s (PMI) reports on Tuesday. Last month’s figures beat expectations, especially in the services sector. With consumers worldwide pulling their belts in the Service PMI will be watched closely to see whether the same is happening in the EU as Summer approaches. Much of Europe celebrates Ascension Day on Thursday, a public holiday, most notably in France and Germany. This morning as this note lands in your inbox Ifo will release its surveys on German business conditions, which are expected to have worsened slightly over the last month.

USD: Just as it looked impregnable, the mighty dollar backed down last week as fears over an impending recession took hold in the US. Wall Street and the stock markets finally realised that the Federal Reserve will not come to investors’ rescue until inflation is out of the system. As the attractions of holding riskier assets, such as shares, waned, the appeal of government bonds increased, forcing yields lower, making the dollar less attractive. This week, the only significant data releases for the G3 currencies are in the US. The data week starts tomorrow with preliminary Purchasing Managers Indexes and New Home Sales released. Durable Goods orders are scheduled for Wednesday, First Quarter Gross Domestic Product (second estimate), and the weekly jobs data are on Thursday. On Friday, the Federal Reserve’s favoured measure of inflation, the Personal Income and Spending report, including the core Personal Consumer Expenditure deflator, is published. Also scheduled are the minutes from the last FOMC meeting, which will almost certainly confirm the prospect of two .5% rate increases at the June and July meetings. There are plenty of speakers from the Fed who are expected to carry on with their hawkish rhetoric starting this afternoon with Raphael Bostic; tomorrow, it’s Jerome Powell’s turn, and on Friday, possibly the most prominent hawk at the Fed, James Bullard.