By Lauren Buckner
The USD continues to strengthen as currency markets try to work out which currencies present the most attractive investment. Like most other financial markets there is a ‘risk-off’ sentiment driving market movement at the moment, and this flight to the USD (a safe haven and globally the most heavily traded currency) is representative of the uncertain outlook ahead. The USD currently sits at a 2 year high against the Pound and over a 10year high versus the euro.
GBP remains fairly stable in its new range against both the US Dollar and the Euro despite last week’s disappointing GDP numbers. Showing 0.8% growth for Q1 opposed to an expected 1% wasn’t overly surprising, but all of this growth happened in January. February showed neutral growth but for March, as the cost of living starts to bite, the economy actually contracted. The fear around Sterling is that as the cost of living continues to rise due to global price pressures (war in Europe, shipping issues from China, rising oil and gas prices etc) and the economy continues to contract, (as it did in March) we hit stagflation.
Stagflation generally overlaps recession with high unemployment spiralling and prices rising in a way that can not be controlled with interest rate policy – every economist’s nightmare. The economic damage this causes can last for many years and should be avoided at all costs if possible, the Bank of England’s fears for the UK economy as highlighted in their recent meeting minutes.
Following the recent Northern Ireland assembly elections on 5th May, (further increasing uncertainty in the UK) focus is also on the Northern Ireland protocol after the Democratic Unionist Party refuse to re-enter the assembly with the protocol in its current form. They argue that its aim to allow free trade across the Irish border is not working and has in fact eroded Northern Ireland’s position in the UK and the powers that devolution had given them. Boris Johnson is reportedly planning to introduce legislation to unwind certain areas of the protocol arguing that it is insufficient to govern a post-covid and EU war era. Hailed as a new bargaining tool versus the EU in order to force renegotiation or ‘tweaks’ Boris could risk a trade war with the EU once again, leading to even further price rises and driving inflation.
Away from the UK the global outlook is just as unsettled. The EU also continue to experience increased levels of inflation and difficulty with oil and gas prices as the dependence on Russian supplies takes hold. A new round of covid lockdowns in China also continues to cause concern as the supply of goods on a global level will be impacted by factory closures and the lower supply further ignites the rise in prices. The slowdown in production also reduces the demand for raw minerals and materials and starts to impact the Antipodean economies; uncertainty prevails.
Data this week;
UK unemployment rate
EU GDP – forecasted at 0.2% prev 0.3%
US retail sales
UK inflation rate YoY – forecasted at 6.2%
UK consumer confidence & retail sales
EU consumer confidence flash numbers