The pound loses ground

An assortment of factors combined to drive the pound lower at the tail-end of last week. Data played a key role in dislodging sterling from its perch, with the double negatives of weak UK Retail Sales and soft Consumer Sentiment. On the former, Retail Sales slipped 1.4% (MoM/Mar), which was just over 1% worse than the number-crunching department had foreseen. That put the yearly figure at a disappointing 0.9%. Around the same time, the GFK Consumer Confidence survey slipped to a nasty-looking -38 versus against an expected print of -33 (Apr). That is within a whisker of an all-time low. Ouch.

The UK consumer is not a happy bunny

These are worrying times for both the UK consumer and the BoE. With the cost of living already skyrocketing in the UK, and the impact of the latest energy cap price rises now just filtering through, the clear evidence from the latest economic data suggests that UK consumers are already tightening their collective belts. A look at how many more people that are now using charity services and food Banks paints an even more sombre picture. Even those lucky enough to have a regular salary are often finding that their income is not keeping up at a pace anywhere near that rocket-propelled UK inflation.

The BoE walk the tightrope

This puts the BoE in a difficult spot, as they try to balance surging inflation, with an unprecedented squeeze on living standards. The likes of the BoE’s Mann would like to hike UK rates for the fourth time, but raising interest rates into a weakening economy doesn’t end well in any text book, so the BoE need to be smart. On the political front, worries over Northern Ireland also played a part in further heightening market anxiety, with Boris Johnson threatening to tear up the agreement between the UK and EU, and the U.S having to remind both sides to forge a compromise.

The pound lives up to its name

All of this ensured that the market reacted by selling the pound across the board. Having spent the past couple of weeks in a tight range, gyrating either side of 1.3000, GBP/USD succumbed and slipped to a 1.2835 close by Friday evening. We have since moved back under 1.2800. GBP/EUR moved back under 1.1900. Whilst there is no scheduled keynote UK data this week, there is still much out there to potentially upset the sterling applecart.

DXY well above 100

The dollar finished last week with the DXY (dollar index) safely above 100, reaching a new two-year high at 101.64 in the process. As we said in our most recent weekly publication, markets have now moved to fully price in three 50bps rate hikes from the Fed for the next three meetings. Strong economic data and Fed-speak have combined to convince markets that the Fed will be up to the task, and in the latter, Jerome Powell did little to change their opinion, when he spoke on Thursday for the final time before the quiet period, ahead of the May FOMC meeting. This helped to ensure that the greenback finished last week very much on the ascendency. USD/CAD moved back over 1.2700, shaking-off the strong Canadian inflation, and the BoC’s 50bps hike just a week beforehand. The BoC’s governor, Macklem, is speaking today, and we may see more hawkish language on the potential for further rate hikes in Canada.

Macron wins again

EUR/USD slipped back under 1.0800 at the end of last week, despite those hawkish ECB comments from the ECB’s Kazaks on the chances of a potential summer rate hike. There was a brief respite for the single currency overnight, as news filtered through that Emmanuel Macron had defeated Marine Le Pen in the run-off for the French presidency. Macron has pledged to unite France during his 2^nd term in office. EUR/USD popped over 1.0840 on the Asian open, but has since dropped over 100 pips. Markets had been expecting a Macron victory, and so the positive impact to the single currency has been somewhat fleeting.

What else is happening today?

After that weak UK data at the tail-end of last week, the latest Rightmove House Price Index might gain some extra attention from markets. In Germany, the latest IFO is released, and the survey is expected to decline across all three components of the index. The latest Japanese Unemployment figures are released just before midnight.