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Wes Streeting, who resigned as Health Secretary on Thursday. (Zeynep Demir Aslim / Shutterstock.com)
This morning the markets will be reacting to a weekend of early campaigning in the race to become the next prime minister – for a vacancy that is not yet there. They will be assessing the likelihood of whichever candidate – if any – replacing Sir Keir Starmer and what that could mean for the British economy. First up was Wes Streeting, staking out his claim for a return to the European Union.
The biggest question for now is whether Andy Burnham – current odds-on favourite to be next PM – can make himself eligible by winning the Makerfield by-election. Angela Rayner is around 5-1 to replace Starmer and you can get 10-1 on Wes Streeting.
Betting on the future of the country is exactly what the currency markets will be doing too. If your business’s finances would be negatively affected by a drop in sterling, it’s usually best to be proactive in risky times.
The pound lost well over 2% on the US dollar last week, around 1% on the euro and similar amounts against the yen and Swiss franc, with the by-election hold-up probably helping to support sterling.
This is a big week for potentially market-moving data for sterling too, with all the big readings – unemployment, earnings, inflation, the Purchasing Managers’ Index (PMI) and retail sales coming out over the next four days. Although the next Bank of England (BoE) interest rate decision is not for a month, the markets will be looking for signs on how the economy is doing as the first post-Iran war readings come in. Last week the economy was revealed to have grown more than expected in the first quarter of the year, with GDP up 0.8%. Maybe better than expected, but not necessarily indicative of the next quarter. A report from BDO, a professional services firm, found that 60% of mid-sized firms have shelved or cancelled investment and hiring plans as they wait for a resolution to the war in the Middle East.
One of the BoE’s interest rate setters – Sarah Breeden, warned that they should not be “trigger happy” on interest rates, but be a steady hand in creating a stable environment for business. Nevertheless, even without any official hikes from central banks, across the USA and Europe mortgage costs have already risen sharply, including to 5.1% in April from 3.97% at the end of February on a typical UK mortgage.
GBP: Will pound bounce back? The data's in control again
So, after all the political drama last week, now we have a month’s wait for the Makerfield by-election. In the meantime sterling’s rapid descent on Friday seems to have been checked. This week the economy will be under the microscope, with the first important reading being unemployment and earnings tomorrow. However, it’s inflation on Wednesday that will govern monetary policy and take the pound up or down with it.GBP/USD: the past year
EUR: No clear direction
The euro has been weakening against the US dollar but strengthening against sterling of late, as the uneasy ceasefire in the Middle East continues to leave European economies under threat, but not in crisis. Last month European business was in a miserable mood, with many PMI readings way down in the 40s. Have they improved? We’ll hear on Thursday.GBP/EUR: the past year
USD: Supported by safety
The dollar has continued to benefit from a cautious global mood and relatively attractive US returns. It strengthened dramatically last week, pretty much across the board. Markets have been reluctant to sell the dollar aggressively while energy prices and geopolitics keep everyone on edge. Things are pretty quiet on the data front, which has allowed the increase in producer price inflation (PPI) last week to remain top of mind.USD/GBP: the past year
For more on currencies and currency risk management strategies, please get in touch with your Smart Currency Business account manager on 020 3918 7255 or your Private Client account manager on 020 7898 0541.
