By James Caley
Currency markets begin the week relatively steady despite the UK local election results dominating headlines throughout Friday and the weekend. Sterling softened slightly as results came in overnight on Friday but recovered well, with the overall impact on exchange rates remaining limited. Reform UK’s gains across a number of areas attracted significant attention, although this has so far done little to shift overall market direction.
While the markets’ reaction has been fairly muted so far, this week still carries the potential for increased volatility, particularly with several major US economic releases due.
The main focus for currency markets this week will be the major inflation releases due in the US. Tuesday’s inflation figures are particularly important following recent concerns around rising oil prices and disruption linked to Iran and the Strait of Hormuz. Markets are expecting annual US inflation to rise from 3.3% to 3.6%. If inflation comes in higher than expected, this could increase expectations that US interest rates remain higher for longer, which may strengthen the dollar and create pressure on GBP/USD and EUR/USD exchange rates.
Wednesday brings US Producer Price Inflation figures, followed by US retail sales data on Thursday. Retail sales are expected to slow which may increase concerns that higher prices are beginning to impact consumer spending and economic growth. With several important releases packed into a short period, there is certainly scope for sharper market movements as the week progresses.
It is a quieter week for both the UK and Europe. Germany’s ZEW Economic Sentiment Index on Tuesday is expected to remain weak, highlighting ongoing concerns around the Eurozone economy. In the UK, Thursday’s GDP figures are forecast to show modest growth during the first quarter. While not expected to be a major market mover on their own, any stronger than expected reading could provide further support for sterling.
Markets can move quickly when inflation or interest rate expectations change, making it important for clients with upcoming currency requirements to stay close to developments.