Pound found some support throughout the week – Sterling Update

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GBP

The pound found some support throughout the week, with GBP/USD rising from a low of 1.2550 to push back over 1.2750 before moderating somewhat. The path forward is likely to be dominated by broader dollar positioning, with GBP/USD set to follow the direction of other dollar majors. GBP/EUR has declined to back under 1.1700 this week, having tapped a one-year high near 1.1800 on 23rd August.

The movement seems to have been driven by the broadly weaker dollar, following the run of weaker data coming out of the US this week, as opposed to any specific emerging sterling strength. In fact, the few pieces of incoming UK data this week were unlikely to have encouraged sterling bulls – including the latest survey from the British Retail Consortium confirming the UK witnessed the slowest increase in shop prices for almost a year.

The Bank of England’s chief economist, Huw Pill, speaking at a monetary policy conference in South Africa yesterday, talked about the potential for “inflicting unnecessary damage” increasing as the Bank moved closer to the end of its hiking cycle while also reiterating that monetary policy would need to be “sufficiently restrictive for sufficiently long” to tame stubbornly high inflation.

The UK housing market is also showing little signs of an imminent recovery, with the latest report from Zoopla indicating overall house sales slipped to levels last seen in 2012.

EUR

The euro, having rallied from under 1.0800 against the dollar to almost 1.0950 throughout the early part of the week, slipped back to under 1.0830 on Thursday afternoon, marking the most significant daily decline for the pair for around five weeks.

The pivot came after data confirmed that recent declines in inflation throughout the region reversed over the last month. Three of the biggest economies in the EU, Germany, France, Spain, and the region, saw headline inflation accelerate more than expected during August – although on a preliminary basis.

The news could impact the chances of further interest rate hikes in this cycle from the ECB, as the market’s expectation of an increase in September edged up. ECB policymakers also seemed to highlight the possibility, with Vice President Luis de Guindos saying the “decision was open” for September’s meeting at a panel in Santander, Spain, yesterday. He also spoke about how the inflation outlook hadn’t changed according to the ECB’s latest forecasts.

The minutes from July’s meeting yesterday added to speculation, detailing that “a further rate hike in September would be necessary if there was no convincing evidence that the effect of the cumulative tightening was strong enough to bring underlying inflation down“.

There will be another data-heavy week for Europe next week, with regional growth, employment and retail sales data expected.