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Currency markets recovered from a chaotic Friday after a diplomatic boost.
Sterling endured a rocky start to the week yesterday thanks to some choppy movements in currency markets, where the mood spun from risk-averse to risk-on in the space of just a few hours.
Friday’s jitters looked set to spread across the financial system until Israel and Iran announced they would halt their latest military strikes. The price of oil fell sharply below $95 per barrel despite the lack of any quantifiable progress in talks to end the wider war. Meanwhile, the wobbles we saw in AI and other tech industries to end last week more or less evaporated on Monday, providing another healthy tailwind.
Still, the pernicious impact of the war continues to wind its way through the global economy. UK employers turned to temporary workers as they reduced permanent hirings at the fastest pace in ten months in May. Businesses are understandably cautious to make large investments, but this has seen labour dynamics tilt sharply towards an excess of supply in recent months.
This morning’s news that the German trade surplus was largely unchanged at €14.5bn in April broke the silence of a quiet Monday from a data perspective. We’ll get an update on American homebuilding this afternoon, but the major moments of this week will be Wednesday’s US inflation data, Thursday’s interest decision from the European Central Bank, as well as Friday’s UK GDP release.
Economists around the world spent much of Monday trying to make sense of why, after such a sharp sell-off on Friday, stock markets recovered to begin the week. Part of that could be explained by more positive geopolitical developments, but there was also an element of ‘buying the dip’, with canny investors going shopping for trendy tech bargains.
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GBP: Dovish instincts
The Bank of England’s Alan Taylor, recently one of the most vocal dovish voices in the Monetary Policy Committee, used a television interview on Monday to argue against imminent rate cuts. Taylor told Sky News he was “comfortable where we are” unless the situation takes a turn for the worse, a scenario he did not expect was likely.GBP/USD: the past year
EUR: 99.9% sure
Using the magic of implied statistics, investors believe there is a 99.9% chance of the European Central Bank announcing a quarter-point rate hike at its meeting on Thursday (0.25%). The euro strengthened against both the pound and the US dollar yesterday ahead of a decision that has fast become seen as a slam dunk. However, the risks of assuming anything at the moment are massive.GBP/EUR: the past year
USD: Warsh in the hot seat
The new chair of the Federal Reserve will endure a baptism of fire over the next two weeks. With expectations growing that the Fed will have to increase interest rates, President Trump went on television over in the States to argue vociferously against higher borrowing costs. The US dollar will be in the spotlight alongside tomorrow’s inflation read, but Warsh too will be feeling the heat.USD/GBP: the past year
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