Another strong week for the pound – Sterling Update

GBP

It has been another strong week for the pound, with GBP/USD testing the 1.2500 region once again. The move higher has been all the more noteworthy, given that most of the UK newsflow has been on the negative side. Our good friends at the IMF continue to believe that the UK will have the worst performing economy of any G20 country this year, with the economy expected to contract by 0.3%. The figure has been revised sharply higher from the previous semi-annual update from the IMF, an improvement that was not lost on the chancellor, who highlighted that the UK economy has had the biggest upgrade of any major economy from the IMF.

The latest growth figures did not really give much away on whether the IMF are in the right place, with last month’s GDP flatlining, having risen by 0.4% in January. Both Industrial and Manufacturing Production softened, with the former dropping by 0.2% over the past month, against an expected increase of the same level, and the latter flatlining, having been expected to also jump by around 0.2%. There was some better news on non-EU trade, with the Trade Balance dipping from -£7.25B to -£6.5B. Speaking at this week’s IMF meetings, BoE governor Bailey hinted at changes to deposit protection levels (FSCS) for consumers, with increased levels muted.

It is a big, big week for UK data next week, with inflation and employment data due. Both Headline and core inflation are expected to have declined on an annual basis over the past month, which if true could help to influence the BoE’s outlook on rates. The robust labour market is also expected to persist, with ILO unemployment predicted to remain near the 3.7% region.

EUR

The recent trend of a rising Euro has elevated EUR/USD back over 1.1000 this week. As well as being a key psychological level, 1.1000 marked the top of the range for the previous rally, so all eyes will be fixed to see where the single currency goes from here. The upside remains the path of least resistance. The last time that EUR/USD traded over 1.1050 was over a year ago. GBP/EUR has also faltered, despite the stronger pound, reflecting the surging Euro. GBP/EUR moved back below 1.1350 earlier in the week, having remained close to 1.1400 for a while. EUR/JPY is also worthy of a mention, with the pair rising sharply to 147.00, given the softening Yen.

Aside from a broader rally amongst risk assets, which will help to fuel rallies in EUR/USD, much of the rally in EUR/USD has been down to changing rate dynamics between the US and Europe. Markets have been reacting to ongoing hawkish messages on rates from the ECB, coupled with growing expectations that the Fed will likely revert to a series of rate cuts before the year end. History tells us that soon after the Fed stop hiking, the rest of the world are likely to follow, but we are not quite at that place yet. On the data front, the latest German inflation data confirmed the preliminary release, with key Harmonized CPI rising by 7.5% on an annual basis, which came in much lower than the 8.7% increase recorded over the first two months of the year. There was also a decent jump in regional Industrial Production, which increased by 1.5% during February and 2% annually. Looking ahead, both French and Spanish inflation are reported today, with the key regional inflation data out next week. The rest of the week will see the latest German and region-wide ZEW Surveys released, as well as a batch of PMI data.