This week ahead – Are 2023’s Sterling high’s set to continue?

For the first time in 2023, we saw the Pound breach the 1.16 ceiling against the euro last week. On the 1st of June 2023 we saw a new a 2023 high reached for GBPEUR of 1.1667 with sterling managing to maintain a mid-market level of above 1.16 for the remainder of the week. The Pound saw similar rises against several currencies, most notably the Australian and New Zealand Dollar, respectively climbing to both 2- and 3-year highs.

Analysts have raised their bets on further rate hikes by the Bank of England in coming months, with the terminal interest rate for the UK now expected to rise to 5.50% by the end of this year.  A further 0.25% hike has been nailed on for June at 90% by the market after UK inflation levels remained elevated at 8.7, a far cry from the Bank of England’s target level of 2%. Current levels are 0.5% higher than the Banks expectation of 8.2% where inflation should be.  The continued interest rate rises have backed by Chancellor of the Exchequer Jeremy Hunt, stating recently that ‘even if they risk plunging the UK into recession, in order to combat soaring inflation’.

This comes in contrast to the Eurozone where inflation figures have undershot expectations with core inflation falling to 5.3%, a figure lower than the 5.5% forecasted by economists. The expectation of further rate hikes by the ECB has now decreased on the release of this data. Poor GDP figures released from Germany; a powerhouse economy of the bloc further dampened the mood earlier this week for the Euro. The expectations of a recession in Germany are now high, along with a 6-month low against the Pound, the euro is near a 3-month low versus the Dollar.

Global risk appetite over the last couple weeks has been diminishing for the US Dollar after concerns in the market that the US government would default on its debt. The borrowing limit was forecasted to be hit on the 5th of June until US congress approved a deal to lift the world’s largest economies borrowing limit on Wednesday. The Pound gained 2 cents on the Dollar over the course of last week with potential extended setbacks after Friday’s confusing jobs report out of the US. The odds of a June rate hike remain low after Friday’s report provided the Federal Reserve sufficient reasoning to pause on raising interest. The non – farm payroll report came in 159k better than the expected 180k with a figure of 339k, a continued rise after last month’s 294k. This figure provided some confusion with unemployment in the US rising to 3.7%, 0.3% up from last month and wages coming in softer. This potential weakness in the job market could hold the FED back at June’s monetary policy meeting.

The Pound is being favoured by both strategists at UBS and Credit Suisse, two of Europe’s largest banks after the Bank of England demonstrates a stronger commitment to fighting elevated inflation compared to it’s G10 counterparts.

Several data releases to look out for this week. Monday being the data heavy day for the Eurozone and US. Monday morning, we have the services and composite PMI releases for the eurozone, France, Italy & Spain. Monday afternoon we see the US ISM services PMI data released. Only the one data release for the UK with the S&P Global composite PMI released in the morning.

On Tuesday and Thursday retail sales data and GDP data is released for the Eurozone, providing a clear indicator of inflation levels for the bloc.

For the US this week we have the trade balance figures and initial job claims data on Wednesday and Thursday.

Any deviation from the expectation from the data releases can cause potential volatility and movement within exchange rates, if you have any questions, speak to one of our experts here and we will be happy to discuss any upcoming exchange with you.