Surprise rate hikes rock markets – Sterling Update

Here’s the latest currency news from our partner Moneycorp, to help you find out what your money is worth.

GBP

It has been a fairly thin news week in the UK, with only limited economic data releases to drive change among key sterling crosses. Perhaps the most significant update came in the shape of the latest S&P Global/CIPS Services PMI, which bucked a broader weaker trend elsewhere by increasing to 55.2 over the past month, having been expected to have remained steady at 55.1. A steep increase in prices for firms, as well as rising wage costs will no doubt be adding to the pressure on the BoE to maintain ongoing rate hikes.

Having declined over the previous month, UK House Prices flatlined during May, according to the Halifax in their latest report. However, on an annual basis prices have now decreased by 1%, which represents the first year-on-year decline since the Halifax report began life back in 2012.

At the time of writing, the pound has also experienced a fairly solid week. Having declined from its recent high of over 1.2600 in early May, GBP/USD found worthy support below 1.2400, and has remained comfortably above that level for most of the week, with the pair moving back over 1.2550 on Friday morning. GBP/EUR has been even more rewarding for sterling bulls, with the pair rising from below 1.1300 at the end of April, to mark a yearly high at over 1.1660 last week. However, the pound has so far been unable to consolidate those gains. GBP/CAD is perhaps the one outlier, slipping from above 1.7000 to around 1.6650, with that stronger Loonie dominating proceedings of late.

Next week is dominated by key growth and employment data, as we edge ever-closer to the next BoE meeting. Much the same as most developed nations, unemployment has remained impressively low in the UK, with the key ILO unemployment rate below 4%. Overall growth has also beat previous dire predictions, and there is evidence that this trend might continue.

EUR

It was not a great week for Europe again, with confirmation yesterday (Thursday) that the region has now slipped into a technical recession during Q1, according to data released by Eurostat, with the economy shrinking by 0.1% over the period. That followed a revised 0.1% decline during Q4, having previously been forecast to flatline. A technical recession is widely accepted as two consecutive quarters of negative growth, so assuming that Eurostat do not revise Q1’s numbers higher, the region has now fallen into a recession, albeit by the smallest of small margins. The move was perhaps not completely surprising, given that Germany, the region’s largest economy and Europe’s engine, said last month that it had already slipped into a recession.

The latest German factory orders continued the weakening data trend this week, declining by a further 0.4% through April, bringing the yearly total down to -9.9% in the process. German Industrial Production actually beat estimates, rising by 1.6% on an annual basis during April, having been projected to have risen by 1.2% over the period. However, the monthly gain of 0.3% fell short of expectations at 0.6%. There was also further evidence of weakening consumer activity, with Regional Retail Sales flatlining over the past month, having been expected to have increased by 0.2%. The ECB’s latest consumer expectations survey also reported households predict annual inflation to fall from 5%, to 4.1% during April.

If all of that was not enough, the latest ISM Service PMIs also largely disappointed, and follow a weak set of Manufacturing PMIs released in the previous week. Of the major European economies, only Italy beat estimates, with both Germany and France witnessing declines.

Despite the region slipping into a recession and that raft of weak data, the ECB continue to sing from the same hawkish songbook. Quite how long that song continues for remains highly debateable, but both ECB head Lagarde and Uber-hawk Klaas knot remained resolute this week. Knot suggested that ‘a longer than expected period of monetary tightening to keep inflation in check will increase the risk of renewed stress on financial markets.’ He still predicts a further two rates in the next two ECB meetings, but the probability of such an outcome is now surely diminishing.

Next week’s ECB meeting will therefore dominate much attention from markets, and whilst the chances of another 25bps inflation-driven rate hike still remain high, the ECB’s language on the day and prospects for further rate hikes will likely come under close scrutiny, given that weakening backdrop. In the meantime, the single currency has defied all the negativity by posting a slight gain throughout the week, with EUR/USD moving back over 1.0775, having reached a recent low of 1.0635 at the end of last week.