A pause from the RBA and another hike from the RBNZ? – Sterling Update

GBP

The BoE governor Andrew Bailey has been highly visible this week, reiterating the need for the BoE to keep focus on fighting inflation in spite of the bank wobbles, which have thankfully missed the green and pleasant shores of the UK (so far). At the same time, Bailey also highlighted the ongoing strength and robustness of UK banks, and that the BoE will not be unduly worried about the health of the global financial system. Strong words, and similar to Christine Lagarde’s comments last week, they may have played a part in calming a nervous market.

Aside from Bailey’s regular updates, it has been a fairly slow week for key UK data, although the latest quarterly UK growth figures, which were released a little earlier this morning, were probably the pick of the bunch. Having previously been expected to slip into a recession, growth has surprised to the upside, with a 0.1% increase (QoQ) and 0.6% (YoY). In both cases, the data exceeded estimates.

As for the pound, well that powerful combination of a broadly weaker dollar, and the market perception of underlying strength amongst UK banks, has helped to ensure that GBP/USD has risen all of the way to just over 1.2400 through this week. Whilst the 1.25% gain might not sound like much of a move, it has helped to take us all the way back to levels not witnessed since the early part of the year. However, before sterling bulls get too carried away, 1.2500 remains the big topside level to watch. As for next week, the latest PMI’s, House Prices and the Easter holiday are likely to dominate proceedings.

EUR

There were some significant differences between the latest Spanish and German inflation reports, which were both released yesterday (Thursday). Spanish inflation really caught the eye, with Harmonized yearly inflation almost halving, yes halving, over the past month from 6% to 3.1%. Markets had been expecting figure around the 4% mark, given the big drop in energy prices. It was not such good news in Germany, with Harmonized CPI dropping from 9.3% to 7.8%. Granted, the figure reflected a sharp drop, but markets were hoping for a dip to around 7.5%, and probably even more given the earlier Spanish report.

The problem with inflation is that, aside from energy, most other key components remain annoyingly sticky. That could be witnessed by the moves in the bond market after the data was released, with yields rising across key German bonds, especially at the front end, as the key two-year Bond saw its yield rising 0.15% to 2.78%. The two-year bond is especially sensitive to perceived interest rate changes, with markets clearly gearing up for further ECB hikes as they maintain their hawkish outlook, in spite of the recent banking wobbles. The ECB’s chief economist Philip Lane suggested this week that more rates hikes would be needed, assuming bank woes are contained, of course.

The single currency has rebounded well after initially being sold off after the SVB worries intensified a couple of weeks ago (already). Indeed, EUR/USD moved back over 1.0900 yesterday (Thursday), and could well benefit from further inflows, assuming that the status quo remains in place for key bank stocks. GBP/EUR remains trapped between 1.1300 – 1.1400, given the strong performance of the pound of late.

Next week’s shortened schedule sees key data shoehorned into four days, with the latest PMI readings probably the pick of the pack.