Having spent most of March gaining on the euro, sterling reversed direction on Friday and lost most of a cent within a few hours. Will that continue this morning or was it simply a correction? The worry for those buying euros is that having failed to break through a resistance level for the past few months it will now crash downwards as the threats to the UK economy and political stability in the UK mount over the coming couple of months.
GBP/USD has shown little clear direction for the past fortnight, but it’s another week where the big driver will be war in the Middle East – in particular whether oil can get through the Strait of Hormuz or whether the war will be stepped up with ‘boots on the ground’. Over the weekend, the rhetoric between Washington and Tehran sharpened again, with fresh threats around shipping and energy infrastructure. When traders can’t be sure oil will flow smoothly, they tend to price in “just in case” risk everywhere.
Central banks are already boxed in between slower growth and rising inflation. The Bank of England (BoE) held rates last week on the risk that higher energy costs push inflation back up. The European Central Bank (ECB) and US Federal Reserve did the same, warning that the war is muddying the outlook for both prices and growth.
The UK data backdrop isn’t exactly giving anyone comfort, with growth at 0% according to the Office for National Statistics (ONS) last week and government borrowing costs rising. There are some important data points this week, starting tomorrow with the Purchasing Managers Index (PMI). These are “flash” surveys of business leaders for the UK, eurozone and the US and will be viewed as an early warning of an impending recession if they turn negative.
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