Sterling Strengthens, ECB Decision Looms, and Dollar Faces Uncertainty
GBP
Sterling has seen a modest uptick against the Dollar this week, with GBP|USD hovering just below the 1.27 mark. Meanwhile, GBP|EUR has remained relatively stable around 1.1670 since early April.
Speculation about potential interest rate adjustments by the Bank of England has intensified, ahead of the June meeting. Recent months have seen UK inflation figures falling below expectations, prompting discussions among policymakers about possible rate cuts. BoE Governor Andrew Bailey’s remarks have further fueled these discussions, suggesting the possibility of two or three rate cuts this year.
The decline in UK inflation is primarily attributed to sluggish consumer spending trends. While retail sales for food items surged in March due to an early Easter, sales in other categories were subdued, largely due to unfavourable weather conditions.
Despite challenges, there are signs of optimism in the UK economy. Large businesses are expressing relief as uncertainties surrounding Brexit, the pandemic, and inflation gradually dissipate. A recent Deloitte survey indicates a more favourable business environment, with the fog of uncertainty seemingly lifting.
Moreover, sentiment towards Sterling has slightly improved, with forecasts suggesting modest growth for the UK economy this year. After narrowly avoiding a technical recession in late 2023, recent projections anticipate a growth rate of 0.8% for the current year.
Looking ahead, investors will closely monitor key economic indicators scheduled for release later this week. The UK monthly Gross Domestic Product (GDP) data and factory output figures for February will provide valuable insights into the state of the economy, particularly within the manufacturing industry.
EUR
This week, all eyes are fixated on the European Central Bank (ECB) as it gears up for its highly anticipated interest rate decision on Thursday. Should the ECB hint at potential interest rate cuts come June, brace yourself for a Euro downturn. And if the bank dares to spring a surprise with an immediate rate cut this month, brace for impact; a significant decline is in the cards.
While the ECB is expected to maintain the status quo at its April policy meeting, recent data releases revealing an unexpected drop in inflation for March have intensified expectations for forthcoming rate cuts. Investors are eagerly scouring for hints regarding the pace of the anticipated easing cycle. Derivatives prices from LSEG indicate market confidence in a more than 90% probability of an ECB rate cut in June.
USD
Amidst mounting uncertainty ahead of the release of the US CPI data for March, the Dollar is facing pressure. This crucial economic indicator, scheduled for Wednesday, is poised to shed light on the potential timing of interest rate adjustments by the Federal Reserve.
Forecasts suggest that both the monthly headline and core inflation are expected to have increased at a slower pace of 0.3% compared to February’s 0.4%. Meanwhile, economists anticipate the annual headline CPI to rise to 3.4% from 3.2%, with core inflation decelerating to 3.7% from 3.8% during the same period.
Market sentiment regarding the Fed’s stance on interest rates is currently centred around the June policy meeting, with expectations leaning towards a shift towards rate cuts. However, the recent upbeat US Nonfarm Payrolls data for March has injected some uncertainty. The robust labour market performance has bolstered the inflation outlook, temporarily easing concerns about imminent rate cuts by Fed policymakers.
If you have an upcoming currency requirement and would like to hear more about what is affecting the markets in the coming weeks, please contact us on 020 3876 5432.