By James Tucker
Sterling had a much better week against the euro last week than it had been having previously. The pound recovered from its recent weakness and finished the week considerably firmer. Stronger revised UK growth figures helped confidence in the UK economy, while concerns around the outlook for some major eurozone economies also gave sterling support.
The move was helped further by expectations that the Bank of England may need to keep policy relatively tight because of persistent UK inflation pressures. By the end of the week, the pound was showing much better momentum against the euro, although the recent recovery still needs to be treated cautiously because UK growth remains a concern.
This week – GBP/EUR
The pound enters this week with some momentum, but there is a clear test ahead. UK services activity is due early in the week, alongside eurozone services activity and investor confidence. Eurozone retail sales and German factory data then provide further clues about the relative strength of the two economies.
For sterling to continue its recent improvement against the euro, UK economic figures will need to remain reasonably resilient. If UK activity disappoints while European figures improve, the euro could regain ground quite quickly. Overall, I would describe GBP/EUR as cautiously positive for sterling at the start of the week, but with room for a pullback if the UK data fails to support the recent improvement.
This week – GBP/USD
The pound starts the week in a more difficult position against the dollar. Sterling suffered a significant setback recently as expectations around US monetary policy supported the dollar, and the pound has been testing some of its weaker levels of the past few months.
This week’s US services data, Federal Reserve minutes and consumer confidence figures will be important. The UK has relatively fewer major releases, meaning the dollar could remain the stronger influence on the pair.
The overall picture therefore remains more negative for sterling against the dollar. A disappointing US data set could give the pound some breathing room, but stronger US activity would reinforce the dollar’s recent advantage.
This week – GBP/AUD
The pound had a relatively supportive period against the Australian dollar, helped by softer Australian inflation and reduced expectations that the Reserve Bank of Australia would need to become substantially more aggressive. GBP/AUD also moved higher towards the end of last week following the Australian inflation figures.
This week is quieter for major Australian releases, although Australian consumer confidence and developments around the RBA’s outlook will be watched. The Australian dollar remains capable of strengthening if Australian economic data improves or expectations for tighter RBA policy return.
Overall, GBP/AUD looks reasonably supportive for sterling in the short term, although the pound’s gains could become harder to extend if Australian data starts to improve.
Overall view: sterling begins the week in a better position against the euro and Australian dollar, but the dollar remains the biggest challenge. GBP/EUR has the most constructive near-term setup, GBP/AUD is also relatively favourable, while GBP/USD remains the pair where sterling looks most vulnerable.
As always stay in close contact with your currency consultant to help you navigate the currency markets.
Relatively little major UK or eurozone data is due later in the week, so markets may react more to the information released earlier in the week.