Politics Fills the Data Vacuum as Central Banks Shape Market Expectations: Sterling Update

Here’s the latest currency news from our partner Moneycorp, to help you find out what your money is worth.

UK Politics remains the primary market driver

Markets continue to focus on the seemingly inevitable arrival of Andy Burnham in a couple of weeks’ time. As Burnham only recently returned to Parliament and, as a result, has not been involved in a recent general election campaign or published a manifesto, there is currently limited information available to provide a clearer understanding of his plans as incoming Prime Minister. This remains especially true given that he has delivered only one public speech and one radio interview since launching his leadership bid.

As such, the pound could remain volatile depending on how key policy issues appear likely to be addressed, such as defence spending plans.

Despite this uncertainty, the pound has remained strong against many counterparts. The fact that the BoE is still weighing up one 25bp interest rate hike later this year will likely have played a role in keeping sterling buoyant.

US focus shifts to the Fed as key data remains limited

The US celebrated its 250th anniversary over the weekend, with President Trump speaking in Washington.

The week ahead is quieter from a data perspective but still includes several releases of note. Later on Monday afternoon, Services PMI is expected to remain around 54, marking another positive month for activity in the services sector, with 50 representing the breakeven level.

Attention then turns to the FOMC meeting on Wednesday, where policymakers will discuss topics including the interest rate outlook and economic projections. Some within Federal Reserve Chair Warsh’s circle believe that one to two rate hikes remain possible this year. Any indication of a shift in that outlook would naturally influence the US dollar.

Eurozone inflation stability reduces pressure on the ECB

Eurozone retail sales figures were released this morning at 1.6%, in line with expectations, followed later this evening by comments from ECB President Lagarde.

Last week, the euro fell to a 12-month low against the pound as expectations of further ECB rate hikes later this year declined. Much of this reflects inflation across the Eurozone remaining close to the ECB’s 2% target, reducing the case for further policy tightening.

Germany, for instance, is expected to report unchanged CPI of 2.4% on Friday. Inflation would likely need to move higher for this outlook to be reconsidered, although that appears unlikely unless the conflict involving Iran were to reignite.

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