Sterling support not strength

By Kian Songra

This week has shown that the pound has shown stubbornness against the euro. With the market still digesting the news of a possible June interest rate cut for the UK, the rates have shown to continue in the trends of last week hovering around the established level of support. It seems concerning that even though we had a positive Gross Domestic Product (GDP) figure showing growth for the UK economy of 0.6%, from the previous -0.3%, we still saw little movements in the rates as the UK exited out of a recession.

Investors faced a challenging situation on Tuesday with the ONS’s latest May labour report, which revealed both escalating wage pressures and increasing unemployment. As the Pound’s reaction unfolds in the aftermath of the announcement, the Pound’s verdict on the apparent contradiction is becoming clearer. We saw the UK’s unemployment rate show an increase on the previous reading by 0.1% to 4.3%.

GBP/USD has rebounded as the impact of weak UK employment data for three months ending in March, shedding off 178,000 jobs from the previous 156,000, was offset by steady wage growth. Also, a decline in the USD despite a hot US Producer Price Index (PPI) reading has boosted demand for the cable.

Remaining data this week

Today we see the Eurozone release their GDP figure, in which the market sentiment is that it will be unchanged at 0.3%. Any unexpected release in this figure could see the market react accordingly, with a stronger result creating further leeway for the European Central Bank (ECB) to cut rates sooner rather than later, dependant on inflationary pressures. The Bank Of England’s Monetary Policy report hearings are also released and any indications from this report will be factored in by many in anticipating what the next move the BoE will make.

We also see a flurry of US data being released in the CPI inflation and retail sales readings. Core inflation is set to come down slightly to 3.4% from the previous 3.5%. Another stronger-than-expected inflation reading on could spark more worries that an overheated economy will force the Fed to raise rates again, throwing cold water on investors’ recent optimism.

Retail Sales data is widely followed as an indicator of consumer spending, which is a major driver of the US economy. Retails sales are set to retract to 0.4% from the previous 0.7% reading. Generally, a high reading is seen as bullish for the USD, while a low reading is seen as bearish.

For Thursday we see US jobless claims, housing data and industrial production figures, plus a speech by Fed members Mester & Bostic. On Friday we see Bank of England’s Mann speak, and any comments will be closely watched by investors looking for insights on the near term outlook concerning interest rates. EU inflation data is set to stay unchanged at 2.4%, and any adverse outcome could result in trading volatility as the market reacts to the release. If inflation was to come down further, it could put pressure on the ECBs monetary policy committee to become less restrictive, as inflation is coming under control.

For those with sterling in hand, it could be prudent to look at the various options with your dedicated currency consultant to mitigate any risk, that the anticipated interest rate cuts pose. Investors typically tend to favour currencies that’s countries corresponding interest rates are high. Consequently, an interest rate cut would mean investors’ returns diminish and so they shift to other currencies and safer haven commodities like Gold which has seen all time highs.

With the second half of the week being busier in terms of data releases, it will be wise to get in contact with your currency consultant to discuss your upcoming requirements, so that they can provide friendly guidance on your options moving forward.