Although it has been a challenging week for markets, the pound has actually fared pretty well. GBP/USD started the week at just over 1.2200, and by the time of writing had broken back above the 1.2500 resistance zone.
UK economic Data has probably lent a hand, with the latest inflation reading taking much of the headlines, reaching a dizzy high of 9% (YoY/Apr), and that figure is expected to go even higher over the summer. However, markets had been expecting a jump of 9.1% on the headline. Whilst there was better news on the jobs front, with ILO unemployment slipping to 3.7%, which is nearing 50-year record. The number of available vacancies in the UK is now outstripping the number of people unemployed. That may sound great, but the belief here is that jobseekers are holding out for higher wages to offset the increase in the cost of living, so the UK could be heading towards a wage-price spiral. This unwelcome phenomenon causes further upside pressure on inflation.
So, was that why the pound ended up rallying higher? To a degree, however, the rally in cable may have much more to do with the dollar side of the pair. With markets now becoming far more fixated over the prospects for global growth, worries over a potential recession and stagflation, the worry is that the Fed may not now ultimately be able to deliver on their projected U.S rate hikes (see USD). Much of the earlier decline in GBP/USD can be attributed to that widening interest rate differential between the U.S and UK. If this narrows, then there will be much more of a level playing field.
In the meantime, the latest UK Retail Sales have just been released this morning, and there has been another welcome boost with Retail Sales jumping 1.4% during last month (MoM/Apr), against an expected decline of around 0.2%. That gives the yearly decline a slightly healthier look, with only a 4.9% decline overall, versus an expected drop to 7.2%. Baby steps.
The single currency has been quietly finding its feet, after the big sell-off in EUR/USD throughout April. Recent economic data for the region has helped to underpin the moves, with stronger growth and higher inflation having a notable impact. On the growth side, a 0.3% (QoQ /Q1) gain might not sound like much, but it beat estimates and put the yearly rate at 5.1%, even if the ECB have recently revised 2022 growth projections lower, given the impact to the region from the war in Ukraine. Inflation for much of the region is nearing UK levels.
Those inflation worries are stirring much debate amongst Euro-area officialdom, with the likes of Dutch central bank chief (and ECB member), Klaas Knot, opening the door to the possibility of a larger rate hike from the ECB at their July meeting. This obviously caught the eye of markets, as a mere 100pips of rate hikes have thus far been priced in so far. Any sign that the ECB might all of a sudden become much more aggressive on rate hikes could catch the market somewhat under-priced.
This takes us back to EUR/USD, which has moved from a 1.0350 low to 1.0600. This may not exactly resemble a major rally just yet, but much like as we said with GBP/USD, much of the earlier decline here has been down to interest rate projections. If they narrow over time, then this EUR comeback may have a greater chance of longevity.
With EUR/USD and GBP/USD playing to a fairly similar tune of late, this has resulted in a partial neutralisation in moves for GBP/EUR. A broad range of 1.1600 – 1.1900 persists, with that rally in GBP/USD helping to push the pair to the top side of the range, but we are still well below the 1.2000 region, which characterized sterling’s advantage in April.
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