In our weekly currency note yesterday we wondered whether sterling could build on the momentum generated towards the end of last week. The answer was no, not really. For, although sterling did hold against the US dollar, this was as much because of continuing poor data from the US as market confidence in the pound.
Indeed, sterling started the day by weakening slightly as reports of unrest in the Conservative cabinet dominated the weekend’s headlines. Despite Transport Secretary Chris Grayling’s denials, the City didn’t seem convinced and this all came out as David Davis prepared to begin fresh talks with the EU.
The volatility in the pound of late has been well documented in our currency notes and it’s a trend that looks set to continue.
Meanwhile, the euro continues its strength against the US dollar, although its consistency is arguably the most remarkable factor of recent times. Thursday’s European Central Bank meeting is the next potential hurdle, so the markets will be watching intently for clues throughout the week.
GBP: will inflation push GBP higher?
Sterling held on to the gains it made from Friday despite the news over the weekend. To recap – the catalyst for the positive sterling move came after the UK government officially acknowledged its financial obligations to the EU post-Brexit. It is hoped that this will lighten the mood for the second round of Brexit negotiations which started yesterday.
In the meantime, we have some key economic data released this morning. The Bank of England’s preferred measure of inflation is set for release in the form of the consumer price index. Inflation is expected to remain steady at 2.9%; any deviation from this reading could result in further sterling volatility.
The severity of the movement will be dependent on how the market interprets the reading, what it means for interest rate increases and what impact this will have on consumer confidence. In addition, BoE Governor Carney is due to speak at the unveiling of the new £10 note featuring Jane Austen.
EUR: euro knocking on the door of 2017 highs
The euro continues to trade at elevated levels against its main counterpart, the US dollar, but was unable to break the highs for 2017. In terms of economic data it was light, with only Eurozone inflation data hitting the wires. This showed a reading slightly above expectations. However due to the way it is released (country by country) it did not affect the single currency.
The key event of the week will be on Thursday at the ECB meeting. The market is expecting no change in policy, but it will be looking for clues about the outlook for quantitative easing. There have been reports suggesting the ECB could use this meeting to signpost tapering later this year.
USD: inflation dampens optimism around another rate hike in the US
The US dollar held at a 10-month low against the pound after data dampened expectations of a US rate hike later in the year.
US rate hike expectations have now dropped to a 50% probability after the latest inflation data on Friday. With no top-tier data this week, markets have plenty of time to mull over the future direction of interest rates. The repeated disappointment on prices puts a question mark above the Federal Reserve’s confidence that inflation would soon rebound.
Yesterday afternoon saw US consumer confidence again worse than expected, which compounded the issues for the dollar. Today and the rest of the week remains very quiet on the data front.
For more on currencies and currency risk management strategies, please get in touch with your Smart Currency Business trader on 020 7898 0500 or your Private Client trader on 020 7898 0541.