While the UK took a day off for the May Day Bank Holiday yesterday some of the shine came off sterling’s stellar performance from Friday, though both GBP/EUR and GBP/USD both remain close to multi-week highs.
No particular surprise as to what put a (small) dent in the pound, it’s oil. Fresh flare-ups around the Strait of Hormuz have pushed energy prices higher again, with Brent Crude up at €115 yesterday. That’s down from the $126 heights of last week, when the Bank of England was holding interest rates, but still almost twice the pre-Iran war level.
The weekend’s events have pushed “risk off” back onto the agenda and weakened sterling, but for the pound, there’s a second ingredient. The UK heads into local elections on Thursday and Westminster is busy briefing, counter-briefing and arguing about what the result may mean for the Prime Minister’s authority. A shift leftwards is unlikely to be positive for sterling, especially if Rachel Reeves and her strict fiscal rules also look under threat.
Against that backdrop, sterling started the week on the back foot against both the dollar and the euro. Nothing dramatic, but a reminder that when headlines are doing the running, traders often prefer the perceived safety of the dollar, while the pound can get knocked around by domestic politics even when the data calendar is quiet.
What’s next is a tidy little run of potential catalysts. The US publishes fresh labour-market signals today, with JOLTs job openings, and then there’s Non-Farm Payrolls on Friday. In the UK, Thursday’s results will be picked over for any hint of a bigger political wobble. Add any further escalation around Hormuz, and you’ve got the makings of another lively few days.
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GBP: Local elections threaten sterling
Sterling has eased as the week begins, slipping back against both the euro and the US dollar. The immediate driver is the global mood following higher oil prices which leave the pound exposed. As well as the local council elections this week, we have a final result for services PMI following a rise in positivity in the early readings that left the markets baffled.GBP/USD: the past year
EUR: Euro weakens but hike conversation has started
The euro has recovered composure after dipping to three-week lows in late April, and it is broadly stable against the pound while edging higher against the dollar. The ECB's decision to hold rates last week was unanimous, but the tone around it was notably more hawkish than previous meetings – a June hike was discussed, and markets have moved quickly to price in further increases across the year. Eurozone growth is sluggish, expanding by just 0.1% in the first three months of the year against expectations of 0.2%, but the ECB appears more worried about inflation staying high than about growth staying low. Eurozone retail sales data on Wednesday will be the next test of consumer resilience.GBP/EUR: the past year
USD: Dollar strong as risk returns
The dollar has found support as geopolitics and oil dominate the conversation, strengthening across the board yesterday. Today’s US labour-market update is the next near-term checkpoint, with the bigger jobs report (Non-Farm Payrolls) later in the week. In a world where oil is back in the inflation story, any sign of US demand holding up can keep the dollar underpinned – at least until the headlines calm down.USD/GBP: the past year
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