The pound experienced mixed fortunes against the dollar last week: by Wednesday it had slipped to its lowest level since November 2020 (1.2973), before rebounding above 1.31 for the first time since 5 April following data showing consumer price inflation jumped to the highest since 1981.
Interest rate speculation in focus for the pound
The Easter bank holiday on Monday means it’s a quiet start to the week in the UK economic calendar.
In the absence of economic indicators until Thursday, interest rate speculation will continue to drive investor sentiment towards the pound. This brings a speaking engagement on Thursday for Bank of England (BoE) Governor Andrew Bailey into sharp focus.
The BoE last month softened its policy tightening rhetoric, with rate-setters stressing downside risks to the economy alongside existing concerns about inflation becoming embedded in expectations.
Speaking on 28 March, Mr Bailey said: “It’s appropriate to tighten policy in these circumstances. But we do so recognising the uncertainty, and that there are risks to the outlook for inflation on both sides.”
“And it’s really with that in mind that we changed our language in our last meeting…That is a reflection of, a recognition of the level of uncertainty and the risks we face.”
Despite this, investors still expect the central bank to hike interest rates to around 2% by the end of the year – more than double their current level – following three consecutive rate rises.
The week winds down with the release of three notable data sets from the UK economy: GfK consumer confidence (Thursday), retail sales (Friday) and the S&P Global/CIPS services PMI (Friday).
Pace of Fed policy tightening in focus for the dollar
Investors will be looking for further signals this week about the pace of Federal Reserve policy tightening – with the US central bank’s recent hawkish stance supporting the dollar.
Having raised interest rates in March for the first time since 2018, the central bank laid out an aggressive plan to push borrowing costs higher to counter the economic risks posed by red-hot inflation and the war in Ukraine – a tactic that has been reinforced by comments from Fed officials since.
According to a poll of economists published by Reuters last week, the Fed is expected to action two back-to-back half-point interest rate hikes in May and June to rein in inflation.
Several economic indicators could influence the Fed’s rate outlook this week: initial jobless claims (Thursday), the Philadelphia Fed manufacturing survey (Thursday) and the S&P Global composite PMI (Friday).