Bring on the Fed (and the ECB)– Sterling Update

Bring on the Fed (and the ECB)– Sterling Update


It has been a fairly quiet week for UK data. However, the latest data from the ONS confirmed that the UK government borrowed less than had been expected during the 2022-23 fiscal year. The £132.2bn total was around £13.2bn less than had been forecast, largely due to lower than predicted public borrowing over the period. This saving could potentially be passed on in the shape of previously unexpected tax cuts during the Autumn budget statement.  

That would benefit many, given that a separate and rather downbeat report showed signs of increasing stresses among UK consumers. According to the report, around 40% of all 35-44 year olds are now resorting to borrowing to make ends meet on a monthly basis. That number is painfully high. Clearly the big impact to their cost of living and ongoing double-digit inflation are the drivers here. It is worth noting, that most are also in full time employment. The report will give both the BoE and government some serious food for thought. 

The pound has also been fairly rangebound throughout the week, with GBP/USD attempting to gain a foothold over 1.2500 during Wednesday but was then dragged down by deteriorating market sentiment. Cable* then spent the rest of the week in the mid 1.24’s for the most part. GBP/EUR edged back under 1.1300, highlighting the Euro’s slight dominance over the pound. Looking ahead, it is a fairly quiet week for UK data, with the BoE set to announce their latest policy decision during the following week. Taking that into consideration, the pound is likely to be driven by broader market moves, assuming no unexpected hiccups occur elsewhere.  

*Cable is the market term for GBP/USD 


The ECB are expected to increase Euro area rates by another 25bps, at the conclusion of their latest policy meeting next week. Although headline inflation has moderated throughout the region, albeit at different speeds, persistently high core inflation remains a big concern for the ECB. On that note, the ECB’s Wunsch explicitly highlighted this week that the ECB are waiting for core inflation to go down before they can arrive at the point where they can pause rate hikes. He said similar hawkish comments this time last week. Just in time, the latest inflation data is released next Tuesday, and expectations currently predict a softer headline, combined with that higher core.  

Markets currently expect the ECB to follow next week’s meeting with another 25bps hike during the following month. Given that the Fed will likely have paused hiking US rates by then, those diverting rate dynamics have been one of the big drivers in assisting EUR/USD’s drive to a new 2023 high above 1.1050, which it tagged earlier in the week. However, we have argued that once the Fed stop hiking, other major central banks are likely to follow suit soon after. Think of it a bit like when Forrest Gump stopped running. The path forward from there may be more uncertain, and life is like a box of chocolates.  

It has been fairly quiet on the data front for the Euro area this week. The latest German IFO survey was a mixed bag, delivering opposing signals after Expectations rose for April from 91 to 92.2. However, a weaker Current Assessment and overall Business Climate took some of the shine off the latest survey. The rise in expectations may have been partly aided by a rebound among German activity since the beginning of the year.  

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