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What will happen next? (1000 Words / shutterstock)
Sterling’s interesting start to February saw it hit a near five-year high on the US dollar and six-month high against the euro on Wednesday. It then drifted by some 2% against USD and just over 1% against EUR.
The pound’s sudden fall was caused by two things. Firstly, the Bank of England (BoE) surprised the markets by very nearly cutting interest rates – the vote was 5-4 – thereby signalling that they are more likely to cut next month. Secondly, there is the continuing risk that yet another prime minister could be forced out within only a couple of years of taking office, with all the uncertainty that brings. The likelihood that it would be a more overtly left-wing replacement prime minister may be worrying the market too.
Arguably, that eventuality has moved a step closer with the resignation of Keir Starmer’s chief of staff over the weekend. We will see what the markets make of that today.
Last week’s data was almost non-existent on the UK side, although house prices rebounded by 0.7% in January according to the Halifax, above £300,000 for the first time. However, the Bank of England predicted that inflation will go below 2% very soon, and that will encourage interest rate cuts and a boost to the market.
On the US side, JOLTs job openings were the lowest since September 2020. So it will be all eyes on non-farm payrolls on Wednesday. The likely next chair at the US Federal Reserve suggested that an AI-induced productivity boom would allow for interest rate cuts. However, a poll of economists poured cold water on this idea.
For Europe, inflation has already slipped below 2%, but the ECB was giving no signals that interest rate cuts are on the way.
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GBP: GDP centre stage this week
After a week where sterling’s sharp rise was unceremoniously reversed by a rethink on monetary policy, data comes back into the frame from midweek. There is the British Retail Sales monitor on Tuesday morning, then GDP on Thursday. We’ve also got some members of the BoE’s Monetary Policy Committee speaking.
GBP/USD past year
EUR: Stable euro looks for gains
The markets looked at the politics and economics of the UK and Europe and put their money behind the euro at the tail end of last week. After 10 days ago, when EUR/USD hit its best since the spring of 2020, it has slipped back but remains stable. It’s Europe’s time for a quiet week for data.
GBP/EUR past year
USD: Will NFP echo JOLTs?
Last week there was a shock for the US labour market when JOLTs job openings were their worst for over five years. We’ll see if non-farm payrolls supports that trend on Wednesday. It would certainly argue the case for interest rate cuts, so watch out for the dollar midweek.
USD/GBP past year
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