GBP

The pound ended the week with more positive momentum to the upside against both the euro and the US dollar.  Sterling gained 1.5% versus the USD and is currently sitting towards the upper levels of recent trading ranges with both the dollar and the euro. The pound appeared to benefit from a more stable outlook on interest rate policy in comparison to the dollar, becoming more favoured by investors towards the end of the week. Last week's labour market figures also showed strong wage growth amongst the public sector, manufacturing and financial markets, and the unemployment claimant count subduing. 

The next hurdle for the pound will be the release of the UK's monthly CPI inflation figure for April on Wednesday. With inflation falling to 3.2% in March, its lowest reading since September 2021, expectations are that April’s inflation data will be released at 2.1% year on year which would represent a substantial move towards the Bank’s main remit of a 2pc inflation rate for the UK.

The sharp fall is predicted to be the result of falling energy prices in the UK as the 12% fall in the regulated price cap last month filters through. An aggressive drop in inflation could increase market expectations of a move by the Bank of England to cut interest rates sooner rather than later. 

As it currently stands, there is a 55% chance of an interest rate cut in the BoE’s meeting on 20th June from their current 5.25%, which is a 16-year high. However, comments from the Monetary Policy Committee members and Bank of England's chief economists are still not providing a clear direction. As a result, August's meeting is still the preferred date for a policy change for many investors on the basis that the expected drop in energy prices and strong labour market conditions will cause the Bank of England to proceed with caution.

Chief Economist to the BoE Hugh Pill last week stated that there was still “some work to do” on ensuring inflation gets back to two per cent sustainably, but said a summer rate cut was “not unreasonable”, leaving the door wide open on which summer meetings will see the bank act.

Consumer confidence and Retail Sales data from the UK towards the end of the week could further reflect how much the drop in energy prices is being felt. More disposable income and some snippets of sunshine that could have encouraged a flurry of spending on clothing and entertainment may present an interesting curveball for monetary policy decision-makers. If the data comes in higher than expected, it could potentially provide some reasoning to delay any moves to interest rates, which could be positive for the pound. 

EUR

The euro remains resilient against the pound, which has tightened up the year's trading range so far and firmed up against the US dollar at the end of last week. We have a slow start to the week on data due to bank holidays across some of the key contributors to the zone.

Eurozone stocks opened higher this morning as expectations for an interest rate cut from the European Central Bank in June continue to gather pace. The main release of note will be Thursday's Manufacturing and Services PMI data, which is expected to show continued slow expansion in the sectors. Following six consecutive quarters of slow and sometimes negative growth for the EU, this could continue to strengthen the argument in favour of an interest rate cut.  

USD

Risk appetite appeared to return to markets at the end of last week, as demonstrated by a rebound in commodity prices (gold and silver prices of particular note) and a sell-off of the US dollar.

The dollar sell-off coincided with a flurry of lower-than-expected data last week from across the Atlantic, which could point to a slowdown in the US economic recovery. Wednesday's CPI release missed expectations of 0.4%, coming in at 0.3% month-on-month, while Retail Sales came in flat versus an expectation of 0.4% growth. Thursday saw industrial production come in lower than predicted, and unemployment claims rise more than expected, alongside additional worrying data releases about the housing market and building permits. Generally, the impact of a slowing economic recovery is that price rises (inflation) will slow, naturally pointing towards an increased appetite for looser monetary policy - lower interest rates. 

The dollar quickly lost ground against most major currencies, having begun the week in a strong position. In particular, its movements versus the pound now point to a breakout of the top of the recent trading range and an increasing likelihood that sterling could benefit from the more ‘certain’ path of monetary policy. This is because, at the moment, investors appear to feel more confident that they know what to expect from the Bank of England than from the Federal Reserve. 

This week, we’ll see a run of public speeches from Fed’s Monetary Policy Committee members, which will be thoroughly analysed by markets for any hints at a policy change.

To date, they have been mostly tight-lipped, with the Fed’s Chair Jerome Powell declining to comment on the US economy and the direction of interest rates in the States when he addressed the Georgetown Law School during its commencement ceremony yesterday. However, Powell did take the opportunity to highlight that inflation still remained higher than expected at a panel in Amsterdam earlier in the week, saying that “we’ll need to be patient and let restrictive policy work.” 

Further data is looking slim for the US this week, with some preliminary manufacturing and service readings being the only potential release note. If the readings come in below expectations, it could make the dollar more susceptible to lower market sentiment off the back of the recent less positive data, which would filter in to its value in forex markets.