Pound finishes the week on a strong rally against Dollar and Euro, important week of economic data ahead

The pound again finished the week on the front foot against the Euro, with the highest trading level on Friday (1.1727) just over 10 pips away from the recent 10-month high (1.1738) set by the pair. Arguably the biggest driver of recent Sterling strength is the persistent interest rate hike/potential coming out from the Bank of England (BOE).

The interest rate hikes create an advantageous opportunity for overseas investors to hold large quantities of Sterling and benefit from the improved returns it offers compared to its counterparts. Thus, creating a demand for the pound. JP morgan have not ruled out the UK base rate touching 7% should conditions warrant these levels.

With futures markets currently pricing around 75% chance of a 0.5% base rate rise from the BOE in August.

In addition to the above, another element to consider is recent Eurozone data which is overshadowing an assertive stance from the European Central bank, who have gone against their usual conservative approach and been relatively hawkish in recent actions/comments. Recent data sets have advised factory activity & production in the Eurozone shrank at the fastest rate in three years, reaching its lowest point since June 2020 (Peak covid).

Data out from Germany around their export levels in May came in surprisingly under the forecast, with an expected growth of 0.3% but an actual print of -0.1%. The end of the week again saw worrying data out from the Eurozone’s powerhouse economy. Germanys industrial production took a downturn, a forecast of 0% (no growth) was expected however there was a 0.2% decrease following the much better 0.3% growth reading in April.

These two pieces of data sparked mild concern for the health of Germanys Economy, weighing in on the single currency. Some Analysts are predicting Germany to have the lengthiest recession since the financial crash of 2008.
Further disappointing data from the Eurozone caused weakening of the single currency. Weaker than expected Services PMI data (an index measuring the direction of the services sector by evaluating employment, new orders, business activity and deliveries) printed a very tame 52 in June, down from the 52.4 expected but most importantly down from Mays 55.1 recording. A reading of 50 is considered as expansion in the sector but this print was the lowest since January.

Nevertheless, Japanese Bank Nomura have recently published their negative stance on EUR/GBP and expect to see the pound decline until the end of 2023. Their FX strategy team are calling for EUR/GBP to be trading towards 0.88/0.90 which would see a substantial fall from grace for the pound. The two big factors Nomura’s Fx strategy team are suggesting the cause of this downfall, are lower UK CPI data in the second half of the year thus causing the BOE to slow down on its aggressive rate hiking approach.

It comes as Credit Agricole also weigh in heavily on the pound, calling Sterling ‘overvalued’ based off their in-house studies. They have published forecasts for 1.06, a huge 9.7% decline from where the pair sits currently.

The Dollar ended the week on the back foot against the pound, with trading levels hitting 1.2849 on Friday equalling the 16th June 13 month high. Key data sets from last week all took their toll on the Greenback, with ISM manufacturing PMI dipped to levels (46) unseen since May 2020. The Federal Open Market Committee (FOMC) released their minutes of their June meeting on Wednesday which failed to spark any life into the Dollar although they did reinforce the potential for more interest rate hikes if they are needed.

These comments have given an estimated 90% probability of a 25 basis point hike from the Federal reserve in their meeting this month. The week closed with the Non-farm payrolls data for June causing more misery for the Dollar. The print of 209,000 was down from the expected 225,000 causing Cable levels to spike as the pound advanced against the Dollar. Notably Salary data across the US still came across strong, with a 0.1% uptick in average earnings.

The week ahead is packed with data most noticeably for the UK, Bank of England Governor Bailey speaks on Monday evening at Mansion house. Tuesday Average earnings which is expected to rise from 6.5%-6.8%, clamant count and unemployment data which is forecast for 3.8%. Wednesday US CPI data is released which is expected to drop to 3.1%. Thursday UK GDP for month on month (May) is expected at 0.2%.

Any divergence from the forecasts could cause volatility, for any currency exposure which you wish to discuss please do reach out to me on [email protected] or fill in the form below.