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How will a US government shutdown affect currencies?
Markets were meant to start this week second-guessing central banks. Instead, they have a far messier backdrop: a partial US government shutdown driven by a row over immigration enforcement (ICE) funding. The risk of that saw the dollar hit a near-five-year low last week, before recovering slightly.
For the UK, the past month has seen sterling butting its head against the same resistance level against the euro. While it remains at close to a six-month high there is no obvious momentum to see it rise above.
No such worries against the US dollar, where sterling, like most other currencies, has been going from strength to strength – albeit it with some of the froth taken off it in the latter part of last week.
This is an interest rate week for the Bank of England. Investors are hunting for any hint of how the Monetary Policy Committee (MPC) sees pay growth, inflation and the timing of future moves, before Thursday. One report they will be looking at is the one this morning from Incomes Data Research, which found that 44% of bosses expect to be paying pay rises of around 3% this year. Of the rest, half would pay less and half pay more.
The ECB also has a rate decision on Thursday. Friday saw a mass of data from the eurozone, most of it positive. That included GDP in the bloc better than expected at 1.3% year on year and unemployment at just 6.2%, a record low in recent history. Is all that at the expense of inflation? German and Spanish inflation did rise above the target 2%, it’s true, and we’ll get more on that this week from the rest of the eurozone. No-one expects a rate increase from the ECB – but what will they signal?
For the dollar, this week is all about the labour market, with the JOLTS jobs report tomorrow and non-farm payrolls on Friday.
So, the result is a classic early-week set-up: one big political story in the US, a heavy central bank diary in Europe and a market that will be quick to change its mind if the headlines change tone. What we’re watching out for is market reaction to the partial US shutdown, plus Thursday’s Bank of England report and the next run of inflation and labour-market signals on both sides of the Atlantic.
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GBP: Bank of England holds the spotlight
After a strong start to last week for GBP/EUR it hits February 0.6% up on a month ago. It was a week where GBP/USD marched up the hill and then straight down again, but it remains close to its best for nearly five years. The key event risk is Thursday’s Bank of England decision (no change and no surprise anticipated) but the press conference will matter as much for tone as for numbers. Investors want to know whether the MPC is still fixated on wage growth, and whether recent price pressures in the UK are enough to keep the Bank cautious for longer.
GBP/USD past year
EUR: Market watches inflation
After hitting its best against the US dollar since the last days of the pandemic in spring 2021, the single currency was knocked off its perch late in the week. The headline inflation number from the countries we’ve seen so far this month suggests that the regional split remains wide, which keeps the ECB’s job awkward. It’s a hectic week for the numbers, starting with final PMI results shortly then more of those inflation reports.
GBP/EUR past year
USD: Shutdown jitters again
The dollar finished last week stronger against both sterling and the euro, but looking like a classic dead cat bounce. Now it begins this week with politics doing what it does best: grabbing attention. The US shutdown story adds a fresh layer of uncertainty at exactly the wrong moment for anyone hoping for a clean, data-led market. There is plenty of data too, however, with PMI today and jobs taking centre stage from midweek.
USD/GBP past year
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