At the risk of sounding like a cracked record, sterling starts the week against the euro pretty much where it has been for 11 months. However, it’s at the upper reaches of that narrow band, and 1% up on this time last month. It’s a more variable picture against the US dollar, but GBP/USD is exactly on the average of the past year.
Will that stability last this hectic week for both politics and economics? Currency markets will have one eye on central banks and the other on Makerfield – a suburb of Wigan – where Andy Burnham is widely expected to become an MP. This would precipitate a process that could soon see a change of prime minister, chancellor, top team and indeed direction of government.
Meanwhile, the US Federal Reserve, Bank of England and Bank of Japan all meet over the next few days, while last week’s European Central Bank (ECB) rate rise is still settling into the market.
This is a lot for currencies to digest, but on the political front at least, so far the markets seem unfazed by a likely Burnham win.
The biggest moment on the economic front comes from Washington, where Kevin Warsh will chair his first Federal Reserve meeting. The markets will be watching for more than just the rate decision. The question is whether he sounds independent, cautious and credible at a time when American inflation has heated up again and the White House has been leaning hard on the Fed.
Much of the dollar’s strength lies in confidence in the Fed’s independence, so a steady message could help calm markets. A political-sounding one could do the opposite.
The UK has its own test coming on Thursday, when the Bank of England announces its latest decision. The Bank held rates at its last meeting, but still warned that inflation could rise further this year. That leaves sterling in a familiar spot: supported by the prospect of higher rates, but held back by weak growth and a nervous domestic backdrop.
We will have that inflation result on Wednesday. And what of the cause of the rise in inflation? The USA and Iran have announced a framework for a peace settlement that they should be signing on Friday, which would see oil flowing freely through the Straits of Hormuz again.
For the euro, the ECB’s rate rise gave the single currency some policy support, even if it was not enough to spark a dramatic move. The bigger question now is whether Europe can cope with higher borrowing costs while growth remains patchy and energy risks keep drifting in and out of the headlines.
GBP: Sterling waits for Threadneedle Street and Makerfield
Sterling edged ahead of the dollar at the end of last week, while moving only slightly against the euro. That suggests that investors are not quite ready to make a big call before the Bank of England. This week’s decision could matter less for the rate itself and more for the mood music around it. If policymakers sound worried about inflation, sterling may find some support. If they dwell on the recent wobble in growth, the pound could struggle to build on last week’s calm.GBP/USD: the past year
EUR: Euro steadies after ECB move
The euro started the week with the ECB’s latest rise already in the rear-view mirror. Higher rates usually help a currency, but this one had been well trailed. That left investors looking for the next clue rather than cheering the decision itself. The single currency made modest ground against the dollar late last week, while barely shifting against sterling. That feels about right. The ECB has moved first, but the Fed and Bank of England now get their turn to shape the story.GBP/EUR: the past year
USD: Dollar looks to new Fed chair
The dollar softened against both sterling and the euro at the end of last week, despite the wider backdrop still looking fairly supportive. Strong jobs, sticky inflation and geopolitical uncertainty would normally give the greenback plenty to work with. This time, the focus is more personal. Warsh’s first meeting is a credibility test as much as a policy event. Markets will want a chair who sounds in control, not one caught between inflation and politics. That press conference could set the tone for the dollar well beyond Wednesday. However, if the USA-Iran deal looks like holding the dollar could well soften further.USD/GBP: the past year
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